FIRST COMMUNITY CORP /SC/ - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
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Annual
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the fiscal year ended December 31, 2005
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Or
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o
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Transition
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the transition period from
to
Commission
file number: 000-28344
First
Community Corporation
(Exact
name of registrant as specified in its charter)
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South
Carolina
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57-1010751
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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5455
Sunset Blvd.,
Lexington,
South Carolina
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29072
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(Address
of principal executive offices)
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(Zip
Code)
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803-951-2265
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
stock, $1.00 par value per share
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The
NASDAQ Capital Market
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
past 90 days. Yes x No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
Yes
o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. Se definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As
of
June 30, 2005, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $45,198,756 based on the closing sale
price of $18.24 on June 30, 2005, as reported on The NASDAQ Capital Market
2,874,192
shares of the issuer’s common stock were issued and outstanding as of March 1,
2006.
Documents
Incorporated by Reference
Proxy
Statement for the Annual Meeting of Shareholders Part
III
(Portions of Items 10-14)
to
be
held on May 17, 2006.
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FORWARD-LOOKING
STATEMENTS
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:
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the
businesses of First Community and DeKalb Bankshares may not be integrated
successfully or such integration may take longer to accomplish than
expected;
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·
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the
expected cost savings and any revenue synergies from the merger may
not be
fully realized within the expected
timeframes;
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·
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disruption
from the merger may make it more difficult to maintain relationships
with
customers, employees, or suppliers;
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·
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the
required governmental approvals of the merger may not be obtained
on the
proposed terms and schedule;
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DeKalb
shareholders may not approve the
merger;
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·
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changes
in economic conditions;
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·
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movements
in interest rates;
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competitive
pressures on product pricing and
services;
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success
and timing of other business
strategies;
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the
nature, extent, and timing of governmental actions and reforms;
and
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extended
disruption of vital infrastructure
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We
undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
Pending
Merger
On
January 19, 2006, we entered into an agreement and plan of merger with DeKalb
Bankshares, Inc., the parent holding company for The Bank of Camden. Pursuant
to
the merger agreement, DeKalb will be merged with and into First Community
Corporation and The Bank of Camden will be merged with and into First Community
Bank. Each share of DeKalb common stock will be converted into the right to
receive $3.875 in cash and 0.60705 shares of our common stock. Assuming no
DeKalb shareholders exercise dissenters’ rights, and assuming the total number
of outstanding shares of DeKalb common stock immediately prior to the effective
time is 610,139, we will issue an aggregate of 370,384 shares of stock and
$2,364,289 in cash. The
boards of directors of both parties have approved the merger agreement, and
the
merger agreement and the transactions contemplated thereby are subject to the
approval of the shareholders DeKalb, regulatory approvals, and other customary
closing conditions.
General
First
Community Corporation, a bank holding
company
registered under the Bank Holding Company Act of 1956, was incorporated under
the laws of South Carolina in 1994 primarily to own and control all of the
capital stock of First Community Bank, N.A., which commenced operations in
August 1995. On October 1, 2004, we consummated our acquisition of
DutchFork Bancshares, Inc. and its wholly-owned subsidiary, Newberry Federal
Savings Bank. We engage in a commercial banking business from our
main
office in Lexington, South Carolina and our 11 full-service offices are located
in Lexington (two), Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin,
Northeast Columbia, Prosperity, and Newberry (two). We
offer
a wide-
range
of
traditional banking products and services for professionals and small- to
medium-sized businesses, including consumer and commercial, mortgage, brokerage
and investment, and insurance services. We also offer online banking to
our customers. Our stock trades on The NASDAQ Capital Market under the
symbol FCCO.
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.
Location
and Service Area
The
bank
is engaged in a general commercial and retail banking business, emphasizing
the
needs of small-to-medium sized businesses, professional concerns and
individuals, primarily in Richland, Lexington, and Newberry counties of South
Carolina and the surrounding areas.
Richland
County, Lexington County and Newberry County are located in the geographic
center of the state of South Carolina. Columbia, the capital of South Carolina,
is located within and divided between Richland and Lexington counties.
Columbia can be reached via three interstate highways: I-20, I-26, and I-77.
Columbia is served by several airlines as well as by passenger and freight
rail
service. According to the U. S. Census Bureau, Richland,
Lexington and Newberry Counties,
which
include the primary service areas for the existing eleven sites of the bank,
had
estimated populations in 2004 of 334,609, 231,057 and 37,209,
respectively.
The
principal components of the economy within our market area are service
industries, government, and wholesale and retail trade. The largest
employers in the area, each of which employs in excess of 3,000 people, include
Fort Jackson Army Base, the University of South Carolina, Palmetto Health
Alliance, Blue Cross Blue Shield and SCANA Corporation. The area has
experienced steady growth over the past 10 years and we expect that the area,
as
well as the service industry needed to support it, will to continue to
grow. For 2003, Richland, Lexington and Newberry Counties had estimated
median household incomes of $39,737, $45,677 and $33,137, respectively, compared
to $38,003 for South Carolina as a whole.
Banking
Services
We
offer
a full range of deposit services that are typically available in most banks
and
savings and loan associations, including checking accounts, NOW accounts,
savings accounts and other time deposits of various types, ranging from daily
money market accounts to longer-term certificates of deposit. The
transaction accounts and time certificates are tailored to our principal market
area at rates competitive to those offered in the area. In addition, we
offer certain retirement account services, such as Individual Retirement
Accounts (IRAs). All deposit accounts are insured by the FDIC up to the
maximum amount allowed by law (generally, $100,000 per depositor subject to
aggregation rules). We solicit these accounts from individuals,
businesses, associations and organizations, and governmental
authorities.
We
also
offer a full range of commercial and personal loans. Commercial loans
include both secured and unsecured loans for working capital (including
inventory and receivables), business expansion (including acquisition of real
estate and improvements), and purchase of equipment and machinery.
Consumer loans include secured and unsecured loans for financing automobiles,
home improvements, education, and personal investments. We also make real
estate construction and acquisition loans. We originate fixed and variable
rate mortgage loans in the name of a third party which, are sold into the
secondary market. Our lending activities are subject to a variety of
lending limits imposed by federal law. While differing limits apply in
certain circumstances based on the type of loan or the nature of the borrower
(including the borrower’s relationship to the bank), in general we are subject
to a loans-to-one-borrower limit of an amount equal to 15% of the bank’s
unimpaired capital and surplus, or 25% of the unimpaired capital and surplus
if
the excess over 15% is approved by the board of directors of the bank and is
fully secured by readily marketable collateral. We may not make any loans
to any director, officer, employee, or 10% shareholder of the company or the
bank unless the loan is approved by our board of directors and is made on terms
not more favorable to such person than would be available to a person not
affiliated with the bank.
Other
bank services include internet banking, cash management services, safe deposit
boxes, travelers checks, direct deposit of payroll and social security checks,
and automatic drafts for various accounts. We offer non-deposit investment
products and other investment brokerage services through a registered
representative with an affiliation through GAA Securities, Inc. We are
associated with Jeannie, Star, and Plus networks of automated teller machines
and Mastermoney debit cards that may be used by our customers throughout South
Carolina and other regions. We also offer VISA and MasterCard credit card
services through a correspondent bank as our agent.
We
currently do not exercise trust powers, but can begin to do so with the prior
approval of the OCC.
Competition
The
banking business is highly competitive. We compete as a financial
intermediary with other commercial banks, savings and loan associations, credit
unions and money market mutual funds operating in Richland, Lexington and
Newberry Counties and elsewhere. As of June 30, 2005, there were 19
financial institutions operating approximately 166 offices in Lexington,
Richland and Newberry Counties. The competition among the various
financial institutions is based upon a variety of factors, including interest
rates offered on deposit accounts, interest rates charged on loans, credit
and
service charges, the quality of services rendered, the convenience of banking
facilities and, in the case of loans to large commercial borrowers, relative
lending limits. Size gives larger banks certain advantages in competing
for business from large corporations. These advantages include higher
lending limits and the ability to offers services in other areas of South
Carolina. As a result, we do not generally attempt to compete for the
banking relationships of large corporations, but concentrate our efforts on
small- to medium-sized businesses and individuals. We believe we have
competed effectively in this market by offering quality and personal
service.
Employees
As
of
December 31, 2005, we had 123 full-time employees. We believe that our relations
with our employees are good.
SUPERVISION
AND REGULATION
Both
the
company and the bank are subject to extensive state and federal banking laws
and
regulations that impose specific requirements or restrictions on and provide
for
general regulatory oversight of virtually all aspects of our operations.
These laws and regulations are generally intended to protect depositors, not
shareholders. The following summary is qualified by reference to the
statutory and regulatory provisions discussed. Changes in applicable laws
or regulations may have a material effect on our business and prospects.
Beginning with the enactment of the Financial Institutions Reform Recovery
and
Enforcement Act in 1989 and followed by the FDIC Improvement Act in 1991 and
the
Gramm-Leach-Bliley Act in 1999, numerous additional regulatory requirements
have
been placed on the banking industry, and additional changes have been
proposed. Our operations may be affected by legislative changes and the
policies of various regulatory authorities. We cannot predict the effect
that fiscal or monetary policies, economic control, or new federal or state
legislation may have on our business and earnings in the future.
The
following discussion is not intended to be a complete list of all the activities
regulated by the banking laws or of the impact of such laws and regulations
on
our operations. It is intended only to briefly summarize some material
provisions.
USA
PATRIOT Act of 2002
In
October 2002, the USA PATRIOT Act of 2002 was enacted in response to the
terrorist attacks in New York, Pennsylvania, and Washington D.C. that occurred
on September 11, 2001. The PATRIOT Act is intended to strengthen U.S. law
enforcement’s and the intelligence communities’ abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the
PATRIOT Act on financial institutions is significant and wide ranging. The
PATRIOT Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations, including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators, and law enforcement entities in identifying
parties who may be involved in terrorism or money laundering.
Check
21
On
October 28, 2003, President Bush signed into law the Check Clearing for the
21st
Century Act, also known as Check 21. This law gives “substitute checks,” such as
a digital image of a check and copies made from that image, the same legal
standing as the original paper check. Some of the major provisions
include:
•
allowing
check truncation without making it mandatory;
•
demanding
that every financial institution communicate to accountholders in writing a
description of its substitute check processing program and their rights under
the law;
•
legalizing
substitutions for and replacements of paper checks without agreement from
consumers;
•
retaining
in place the previously mandated electronic collection and return of checks
between financial institutions only when individual agreements are in
place;
•
requiring
that when accountholders request verification, financial institutions produce
the original check (or a copy that accurately represents the original) and
demonstrate that the account debit was accurate and valid; and
•
requiring
recrediting of funds to an individual’s account on the next business day after a
consumer proves that the financial institution has erred.
This
new
legislation will likely continue to effect bank capital spending as many
financial institutions assess whether technological or operational changes
are
necessary to stay competitive and take advantage of the new opportunities
presented by Check 21.
First
Community Corporation
We
own
100% of the outstanding capital stock of the bank, and therefore we are
considered to be a bank holding company under the federal Bank Holding Company
Act of 1956 and the South Carolina Banking and Branching Efficiency
Act.
The
Bank Holding Company Act.
Under the Bank Holding Company Act, we are subject to periodic examination
by
the Federal Reserve and are required to file periodic reports of our operations
and any additional information that the Federal Reserve may require. Our
activities at the bank and holding company levels are limited to:
•
banking
and managing or controlling banks;
•
furnishing
services to or performing services for our subsidiaries; and
•
engaging
in other activities that the Federal Reserve determines to be so closely related
to banking and managing or controlling banks as to be a proper incident
thereto.
Investments,
Control, and Activities.
With certain limited exceptions, the Bank Holding Company Act requires every
bank holding company to obtain the prior approval of the Federal Reserve
before:
•
acquiring
substantially all the assets of any bank;
•
acquiring
direct or indirect ownership or control of any voting shares of any bank if
after the acquisition it would own or control more than 5% of the voting shares
of such bank (unless it already owns or controls the majority of such shares);
or
•
merging
or consolidating with another bank holding company.
In
addition, and subject to certain exceptions, the Bank Holding Company Act and
the Change in Bank Control Act, together with regulations promulgated there
under, require Federal Reserve approval prior to any person or company acquiring
“control” of a bank holding company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of a bank holding company. Control is rebuttably presumed to
exist if a person acquires 10% or more, but less than 25%, of any class of
voting securities and either the company has registered securities under Section
12 of the Securities Exchange Act of 1934 or no other person owns a greater
percentage of that class of voting securities immediately after the
transaction. Our common stock is registered under the Securities Exchange
Act of 1934. The regulations provide a procedure for rebutting control
when ownership of any class of voting securities is below 25%.
Under
the
Bank Holding Company Act, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in, nonbanking activities unless the
Federal Reserve Board, by order or regulation, has found those activities to
be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve Board
has determined by regulation to be proper incidents to the business of a bank
holding company include:
•
making
or
servicing loans and certain types of leases;
•
engaging
in certain insurance and discount brokerage activities;
•
performing
certain data processing services;
•
acting
in
certain circumstances as a fiduciary or investment or financial
adviser;
•
owning
savings associations; and
•
making
investments in certain corporations or projects designed primarily to promote
community welfare.
The
Federal Reserve Board imposes certain capital requirements on the company under
the Bank Holding Company Act, including a minimum leverage ratio and a minimum
ratio of “qualifying” capital to risk-weighted assets. These requirements
are described below under “- First Community Bank, N.A. - Capital
Regulations.” Subject to our capital requirements and certain other
restrictions, we are able to borrow money to make a capital contribution to
the
bank, and these loans may be repaid from dividends paid from the bank to the
company. Our ability to pay dividends will be subject to regulatory
restrictions as described below in “- First Community Bank, N.A. -
Dividends.” We are also able to raise capital for contribution to the bank
by issuing securities without having to receive regulatory approval, subject
to
compliance with federal and state securities laws.
Source
of Strength; Cross-Guarantee.
In
accordance with Federal Reserve Board policy, we are expected to act as a source
of financial strength to the bank and to commit resources to support the bank
in
circumstances in which we might not otherwise do so. Under the Bank
Holding Company Act, the Federal Reserve Board may require a bank holding
company to terminate any activity or relinquish control of a nonbank subsidiary,
other than a nonbank subsidiary of a bank, upon the Federal Reserve Board’s
determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any depository institution subsidiary of
the
bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of
any
bank or nonbank subsidiaries if the agency determines that divestiture may
aid
the depository institution’s financial condition.
The
Gramm-Leach-Bliley Act.
The Gramm-Leach-Bliley Act was signed into law on November 12, 1999. Among
other things, the Act repealed the restrictions on banks affiliating with
securities firms contained in sections 20 and 32 of the Glass-Steagall
Act. The Act also permits bank holding companies that become financial
holding companies to engage in a statutorily provided list of financial
activities, including insurance and securities underwriting and agency
activities, merchant banking, and insurance company portfolio investment
activities. The Act also authorizes activities that are “complementary” to
financial activities. We have not elected to become a financial holding
company.
The
Act
is intended, in part, to grant to community banks certain powers as a matter
of
right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that we face from larger institutions and other types of
companies. In fact, it is not possible to predict the full effect that the
Act will have on us.
South
Carolina State Regulation.
As a
South Carolina bank holding company under the South Carolina Banking and
Branching Efficiency Act, we are subject to limitations on sale or merger and
to
regulation by the South Carolina Board of Financial Institutions. We are
not required to obtain the approval of the Board prior to acquiring the capital
stock of a national bank, but we must notify them at least 15 days prior to
doing so. We must receive the Board’s approval prior to engaging in the
acquisition of a South Carolina state chartered bank or another South Carolina
bank holding company.
First
Community Bank, N.A.
The
bank
operates as a national banking association incorporated under the laws of the
United States and subject to examination by the Office of the Comptroller of
the
Currency. Deposits in the bank are insured by the
Federal
Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is
generally $100,000 per depositor subject to the aggregation rule.
The
Office of the Comptroller of the Currency and the FDIC regulate or monitor
virtually all areas of the bank’s operations, including
•
security
devices and procedures;
•
adequacy
of capitalization and loss reserves;
•
loans;
•
investments;
•
borrowings;
•
deposits;
•
mergers;
•
issuances
of securities;
•
payment
of dividends;
•
interest
rates payable on deposits;
•
interest
rates or fees chargeable on loans;
•
establishment
of branches;
•
corporate
reorganizations;
•
maintenance
of books and records; and
•
adequacy
of staff training to carry on safe lending and deposit gathering
practices.
The
Office of the Comptroller of the Currency requires the bank to maintain
specified capital ratios and imposes limitations on the bank’s aggregate
investment in real estate, bank premises, and furniture and fixtures. The
Office of the Comptroller of the Currency also requires the bank to prepare
annual reports on the bank’s financial condition and to conduct an annual audit
of its financial affairs in compliance with its minimum standards and
procedures.
Under
the
FDIC Improvement Act, all insured institutions must undergo regular on-site
examinations by their appropriate banking agency. The cost of examinations
of insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports
to the FDIC, their federal regulatory agency, and state supervisor when
applicable. The FDIC Improvement Act directs the FDIC to develop a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution. The FDIC
Improvement Act also requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions
and
depository institution holding companies relating, among other things, to the
following:
•
internal
controls;
•
information
systems and audit systems;
•
loan
documentation;
•
credit
underwriting;
•
interest
rate risk exposure; and
•
asset
quality.
National
banks and their holding companies which have been chartered or registered or
have undergone a change in control within the past two years or which have
been
deemed by the Office of the Comptroller of the Currency or the Federal Reserve
Board to be troubled institutions must give the Office of the Comptroller of
the
Currency or the Federal Reserve Board 30 days prior notice of the appointment
of
any senior executive officer or director. Within the 30 day period, the
Office of the Comptroller of the Currency or the Federal Reserve Board, as
the
case may be, may approve or disapprove any such appointment.
Deposit
Insurance - The
FDIC
establishes rates for the payment of premiums by federally insured commercial
banks and savings banks, or thrifts, for deposit insurance. The FDIC maintains
a
separate Bank Insurance Fund for banks and Savings Association Insurance Fund
for savings banks and thrifts. The FDIC has adopted a risk-based
assessment system for determining an insured depository institutions’ insurance
assessment rate. The system
takes
into account the risks attributable to different categories and concentrations
of assets and liabilities. An institution is placed into one of three
capital categories: (1) well capitalized; (2) adequately capitalized; or
(3) undercapitalized. The FDIC also assigns an institution to one of three
supervisory subgroups, based on the FDIC’s determination of the institution’s
financial condition and the risk posed to the deposit insurance funds.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution’s capital group and supervisory subgroup. In addition, the
FDIC imposes assessments to help pay off the $780 million in annual interest
payments on the $8 billion Financing Corporation bonds issued in the late 1980s
as part of the government rescue of the thrift industry. The FDIC
assessment rate on our bank deposits currently is zero but may change in the
future. The FDIC may increase or decrease the assessment rate schedule on
a semiannual basis. An increase in the BIF or SAIF assessment rate could
have a material adverse effect on our earnings, depending on the amount of
the
increase.
The
FDIC
may terminate its insurance of deposits if it finds that the institution has
engaged in unsafe and unsound practices, is in an unsafe or unsound condition
to
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC.
Transactions
with Affiliates and Insiders - The
bank
is subject to the provisions of Section 23A of the Federal Reserve Act, which
places limits on the amount of loans or extensions of credit to, or investments
in, or certain other transactions with, affiliates and on the amount of advances
to third parties collateralized by the securities or obligations of
affiliates. The aggregate of all covered transactions is limited in
amount, as to any one affiliate, to 10% of the bank’s capital and surplus and,
as to all affiliates combined, to 20% of the bank’s capital and surplus.
Furthermore, within the foregoing limitations as to amount, each covered
transaction must meet specified collateral requirements. Compliance is
also required with certain provisions designed to avoid the taking of low
quality assets.
The
bank
also is subject to the provisions of Section 23B of the Federal Reserve Act
which, among other things, prohibits an institution from engaging in certain
transactions with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies. The bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
The
Federal Reserve Board has recently issued Regulation W, which codifies prior
regulations under Sections 23A and 23B of the Federal Reserve Act and
interpretative guidance with respect to affiliate transactions. Regulation
W incorporates the exemption from the affiliate transaction rules but expands
the exemption to cover the purchase of any type of loan or extension of credit
from an affiliate. In addition, under Regulation W:
•
a
bank
and its subsidiaries may not purchase a low-quality asset from an
affiliate;
•
covered
transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe
and sound banking practices; and
•
with
some
exceptions, each loan or extension of credit by a bank to an affiliate must
be
secured by collateral with a market value ranging from 100% to 130%, depending
on the type of collateral, of the amount of the loan or extension of
credit.
Regulation
W generally excludes all non-bank and non-savings association subsidiaries
of
banks from treatment as affiliates, except to the extent that the Federal
Reserve Board decides to treat these subsidiaries as affiliates. This
regulation limits the amount of loans that can be purchased by a bank from
an
affiliate to not more than 100% of the bank’s capital and surplus.
Dividends
- A
national bank may not pay dividends from its capital. All dividends must
be paid out of undivided profits then on hand, after deducting expenses,
including reserves for losses and bad debts. In addition, a national bank
is prohibited from declaring a dividend on its shares of common stock until
its
surplus equals its stated capital, unless there has been transferred to surplus
no less than one-tenth of the bank’s net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The
approval of the Office of the Comptroller of the Currency is required if the
total of all dividends declared by a national bank in any calendar year exceeds
the total of its net profits for that year combined with its retained net
profits for the preceding two years, less any required transfers to
surplus.
Branching
- National
banks are required by the National Bank Act to adhere to branch office banking
laws applicable to state banks in the states in which they are located.
Under current South Carolina law, the bank may open branch offices throughout
South Carolina with the prior approval of the Office of the Comptroller of
the
Currency. In addition, with prior regulatory approval, the bank is able to
acquire existing banking operations in South Carolina. Furthermore,
federal legislation permits interstate branching, including out-of-state
acquisitions by bank holding companies, interstate branching by banks if allowed
by state law, and interstate merging by banks. South Carolina law, with
limited exceptions, currently permits branching across state lines through
interstate mergers.
Community
Reinvestment Act - The
Community Reinvestment Act requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the Federal
Reserve, the FDIC, or the Office of the Comptroller of the Currency, shall
evaluate the record of each financial institution in meeting the credit needs
of
its local community, including low and moderate income neighborhoods.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. Failure to adequately meet
these criteria could impose additional requirements and limitations on our
bank.
The
Gramm-Leach-Bliley Act - Under
the
Gramm-Leach-Bliley Act, subject to certain conditions imposed by their
respective banking regulators, national and state-chartered banks are permitted
to form “financial subsidiaries” that may conduct financial or incidental
activities, thereby permitting bank subsidiaries to engage in certain activities
that previously were impermissible. The Gramm-Leach-Bliley Act imposes
several safeguards and restrictions on financial subsidiaries, including that
the parent bank’s equity investment in the financial subsidiary be deducted from
the bank’s assets and tangible equity for purposes of calculating the bank’s
capital adequacy. In addition, the Gramm-Leach-Bliley Act imposes new
restrictions on transactions between a bank and its financial subsidiaries
similar to restrictions applicable to transactions between banks and nonbank
affiliates.
The
Gramm-Leach-Bliley Act also contains provisions regarding consumer
privacy. These provisions require financial institutions to disclose their
policy for collecting and protecting confidential information. Customers
generally may prevent financial institutions from sharing personal financial
information with nonaffiliated third parties except for third parties that
market an institution’s own products and services. Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing,
or
other marketing to the consumer.
Other
Regulations - Interest
and other charges collected or contracted for by the bank are subject to state
usury laws and federal laws concerning interest rates. The bank’s loan
operations are also subject to federal laws applicable to credit transactions,
such as:
•
the
federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
•
the
Home
Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether
a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
•
the
Equal
Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit;
•
the
Fair
Credit Reporting Act of 1978, governing the use and provision of information
to
credit reporting agencies;
•
the
Fair
Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and
•
the
rules
and regulations of the various federal agencies charged with the responsibility
of implementing such federal laws.
The
deposit operations of the bank also are subject to:
•
the
Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality
of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records; and
•
the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that Act, which governs automatic deposits to and withdrawals
from deposit accounts and customers’ rights and liabilities arising from the use
of automated teller machines and other electronic banking services.
Capital
Regulations - The
federal bank regulatory authorities have adopted risk-based capital guidelines
for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies and account for off-balance sheet items. The
guidelines are minimums, and the federal regulators have noted that banks and
bank holding companies contemplating significant expansion programs should
not
allow expansion to diminish their capital ratios and should maintain ratios
in
excess of the minimums. We have not received any notice indicating that
either First Community Corporation or First Community Bank, N.A. is subject
to
higher capital requirements. The current guidelines require all bank
holding companies and federally-regulated banks to maintain a minimum risk-based
total capital ratio equal to 8%, of which at least 4% must be Tier 1
capital. Tier 1 capital includes common shareholders’ equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles
and
excludes the allowance for loan and lease losses. Tier 2 capital includes
the excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets.
The
Federal Reserve guidelines contain an exemption from the capital requirements
for “small bank holding companies.” On February 27, 2006, the Federal Reserve
approved a new rule expanding the definition of a “small bank holding company.”
The new definition will include bank holding companies with less than $500
million in total assets. Bank holding companies will not qualify under the
new
definition if they (i) are engaged in significant nonbanking activities either
directly or indirectly through a subsidiary, (ii) conduct significant
off-balance sheet activities, including securitizations or managing or
administering assets for third parties, or (iii) have a material amount of
debt
or equity securities (including trust preferred securities) outstanding that
are
registered with the SEC. The new rule will be effective on March 30, 2006.
Although we have less than $500 million in assets, it is unclear at this point
whether we otherwise meet the requirements for qualifying as a “small bank
holding company.” According to the Federal Reserve Board, the revision of the
criterion to exclude any bank holding company that has outstanding a material
amount of SEC-registered debt or equity securities reflects the fact that SEC
registrants typically exhibit a degree of complexity of operations and access
to
multiple funding sources that warrants excluding them from the new policy
statement and subjecting them to the capital guidelines. In the adopting release
for the new rule, the Federal Reserve Board stated that what constitutes a
"material" amount of SEC-registered debt or equity for a particular bank holding
company depends on the size, activities and condition of the relevant bank
holding company. In lieu of using fixed measurable parameters of materiality
across all institutions, the rule provides the Federal Reserve with supervisory
flexibility in determining, on a case-by-case basis, the significance or
materiality of activities or securities outstanding such that a bank holding
company should be excluded from the policy statement and subject to the capital
guidelines. Prior to adoption of this new rule, our holding company was subject
to these capital guidelines, as it had more than $150 million in assets. Until
the Federal Reserve provides further guidance on the new rules, it will be
unclear whether our holding company will be subject to the exemption from the
capital requirements for small bank holding companies. Regardless, our bank
falls under these minimum capital requirements as set per bank regulatory
agencies, and both our bank and our holding company would be considered “well
capitalized” under these guidelines.
Under
these guidelines, banks’ and bank holding companies’ assets are given
risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight applies. These
computations result in the total risk-weighted assets. Most loans are
assigned to the 100% risk category, except for first mortgage loans fully
secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment
securities are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% rating, and direct obligations of or obligations
guaranteed by the United States Treasury or United States Government agencies,
which have a 0% rating.
The
federal bank regulatory authorities also have implemented a leverage ratio,
which is equal to Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is
3%, but most institutions are required to maintain an additional cushion of
at
least 100 to 200 basis points.
The
FDIC
Improvement Act established a new capital-based regulatory scheme designed
to
promote early intervention for troubled banks, which requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” and “critically
undercapitalized.” To qualify as a “well capitalized” institution, a bank
must have a
leverage
ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and
a
total risk-based capital ratio of no less than 10%, and the bank must not be
under any order or directive from the appropriate regulatory agency to meet
and
maintain a specific capital level. Currently, we qualify as “well
capitalized.”
Under
the
FDIC Improvement Act regulations, the applicable agency can treat an institution
as if it were in the next lower category if the agency determines (after notice
and an opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution increases, and the permissible
activities of the institution decrease, as it moves downward through the capital
categories. Institutions that fall into one of the three undercapitalized
categories may be required to do some or all of the following:
•
submit
a
capital restoration plan;
•
raise
additional capital;
•
restrict
their growth, deposit interest rates, and other activities;
•
improve
their management;
•
eliminate
management fees; or
•
divest
themselves of all or a part of their operations.
These
capital guidelines can affect us in several ways. If we grow at a rapid pace,
our capital may be depleted too quickly, and a capital infusion from our holding
company may be necessary which could impact our ability to pay dividends. Our
capital levels currently are adequate; however, rapid growth, poor loan
portfolio performance, poor earnings performance, or a combination of these
factors could change our capital position in a relatively short period of time.
If we fail to meet these capital requirements, our bank would be required to
develop and file a plan with the Office of the Comptroller of the Currency
describing the means and a schedule for achieving the minimum capital
requirements. In addition, our bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless our bank could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period
of
time. A bank that is not “well capitalized” is also subject to certain
limitations relating to so-called “brokered” deposits. Bank holding
companies controlling financial institutions can be called upon to boost the
institutions’ capital and to partially guarantee the institutions’ performance
under their capital restoration plans.
Enforcement
Powers - The
Financial Institutions Reform Recovery and Enforcement Act expanded and
increased civil and criminal penalties available for use by the federal
regulatory agencies against depository institutions and certain
“institution-affiliated parties.” Institution-affiliated parties primarily
include management, employees, and agents of a financial institution, as well
as
independent contractors and consultants such as attorneys and accountants and
others who participate in the conduct of the financial institution’s
affairs. These practices can include the failure of an institution to
timely file required reports or the filing of false or misleading information
or
the submission of inaccurate reports. Civil penalties may be as high as
$1,000,000 a day for such violations. Criminal penalties for some
financial institution crimes have been increased to twenty years. In
addition, regulators are provided with greater flexibility to commence
enforcement actions against institutions and institution-affiliated
parties. Possible enforcement actions include the termination of deposit
insurance. Furthermore, banking agencies’ power to issue cease-and-desist
orders were expanded. Such orders may, among other things, require
affirmative action to correct any harm resulting from a violation or practice,
including restitution, reimbursement, indemnifications or guarantees against
loss. A financial institution may also be ordered to restrict its growth,
dispose of certain assets, rescind agreements or contracts, or take other
actions as determined by the ordering agency to be appropriate.
Effect
of Governmental Monetary Policies - Our
earnings are affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its agencies. The Federal
Reserve Bank’s monetary policies have had, and are likely to continue to have,
an important impact on the operating results of commercial banks through its
power to implement national monetary policy in order, among other things, to
curb inflation or combat a recession. The monetary policies of the Federal
Reserve Board have major effects upon the levels of bank loans, investments
and
deposits through its open market operations in United States government
securities and through its regulation of the discount rate on borrowings of
member banks and the reserve requirements against member bank deposits. It
is not possible to predict the nature or impact of future changes in monetary
and fiscal policies.
Proposed
Legislation and Regulatory Action.
New regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations, and competitive
relationships of the nation’s
financial
institutions. We cannot predict whether or in what form any proposed
regulation or statute will be adopted or the extent to which our business may
be
affected by any new regulation or statute.
We
cannot guarantee the consummation of our contemplated merger with DeKalb
Bankshares, and if we do not complete the merger our results of operations
and
financial condition will be adversely affected.
We
will
not be able to consummate the merger without the approval of certain state
and
federal regulatory agencies and the shareholders of DeKalb. Accordingly, we
can
give no assurances that those approvals will be obtained or that the acquisition
will be completed. If we do not consummate the merger, our results of operations
and financial condition will be adversely affected due to the costs we have
incurred and time we have spent in preparing for the merger.
Our
recent operating results may not be indicative of our future operating
results.
We
may
not be able to sustain our historical rate of growth and may not even be able
to
grow our business at all. Because of our relatively short operating
history, it will be difficult for us to generate similar earnings growth as
we
continue to expand, and consequently our historical results of operations will
not necessarily be indicative of our future operations. Various factors,
such as economic conditions, regulatory and legislative considerations, and
competition, may also impede our ability to expand our market presence. If
we experience a significant decrease in our historical rate of growth, our
results of operations and financial condition may be adversely affected because
a high percentage of our operating costs are fixed expenses.
Our
decisions regarding credit risk and reserves for loan losses may materially
and
adversely affect our business.
Making
loans and other extensions of credit is an essential element of our
business. Although we seek to mitigate risks inherent in lending by
adhering to specific underwriting practices, our loans and other extensions
of
credit may not be repaid. The risk of nonpayment is affected by a number
of factors, including:
•
the
duration of the credit;
•
credit
risks of a particular customer;
•
changes
in economic and industry conditions; and
•
in
the
case of a collateralized loan, risks resulting from uncertainties about the
future value of the collateral.
We
attempt to maintain an appropriate allowance for loan losses to provide for
potential losses in our loan portfolio. We periodically determine the
amount of the allowance based on consideration of several factors,
including:
•
an
ongoing review of the quality, mix, and size of our overall loan
portfolio;
•
our
historical loan loss experience;
•
evaluation
of economic conditions;
•
regular
reviews of loan delinquencies and loan portfolio quality; and
•
the
amount and quality of collateral, including guarantees, securing the
loans.
There
is
no precise method of predicting credit losses; therefore, we face the risk
that
charge-offs in future periods will exceed our allowance for loan losses and
that
additional increases in the allowance for loan losses will be required.
Additions to the allowance for loan losses would result in a decrease of our
net
income, and possibly our capital.
Lack
of seasoning of our loan portfolio may increase the risk of credit defaults
in
the future.
Due
to
the rapid growth of our bank over the past several years, a substantial portion
of the loans in our loan portfolio and of our lending relationships are of
relatively recent origin. In general, loans do not begin to show signs of
credit deterioration or default until they have been outstanding for some period
of time, a process we refer to as “seasoning.” As a result, a portfolio of
older loans will usually behave more predictably than a newer portfolio.
Because our loan portfolio has grown substantially, the current level of
delinquencies and defaults may not be representative of the level that will
prevail when the portfolio becomes more seasoned, which may be higher than
current levels. If delinquencies and defaults increase, we may be required
to increase our provision for loan losses, which would adversely affect our
results of operations and financial condition.
An
economic downturn, especially one affecting the Lexington, Richland, and
Newberry Counties and the surrounding areas, could reduce our customer base,
our
level of deposits, and demand for financial products such as
loans.
Our
success significantly depends upon the growth in population, income levels,
deposits, and housing starts in our market of Lexington, Richland, and Newberry
Counties and the surrounding area. If the communities in which we operate
do not grow or if prevailing economic conditions locally or nationally are
unfavorable, our business may not succeed. An economic downturn would
likely contribute to the deterioration of the quality of our loan portfolio
and
reduce our level of deposits, which in turn would hurt our business. If an
economic downturn occurs in the economy as a whole, or in Lexington, Richland,
or Newberry Counties and the surrounding area, borrowers may be less likely
to
repay their loans as scheduled. Moreover, the value of real estate or
other collateral that may secure our loans could be adversely affected.
Unlike many larger institutions, we are not able to spread the risks of
unfavorable local economic conditions across a large number of diversified
economies. An economic downturn could, therefore, result in losses that
materially and adversely affect our business.
Changes
in prevailing interest rates may reduce our
profitability.
Our
results of operations depend in large part upon the level of our net interest
income, which is the difference between interest income from interest-earning
assets, such as loans and mortgage-backed securities, and interest expense
on
interest-bearing liabilities, such as deposits and other borrowings.
Depending on the terms and maturities of our assets and liabilities, a
significant change in interest rates could have a material adverse effect on
our
profitability. Many factors cause changes in interest rates, including
governmental monetary policies and domestic and international economic and
political conditions. While we intend to manage the effects of changes in
interest rates by adjusting the terms, maturities, and pricing of our assets
and
liabilities, our efforts may not be effective and our financial condition and
results of operations could suffer. After operating in a historically low
interest rate environment, the Federal Reserve began raising short-term interest
rates in the second quarter of 2004. At December 31, 2005, we anticipate
that our balance sheet is currently structured so that net income is not
materially impacted in a rising interest rate environment. However, no assurance
can be given that the Federal Reserve will actually continue to raise interest
rates or that the results we anticipate will actually occur.
We
are dependent on key individuals, and the loss of one or more of these key
individuals could curtail our growth and adversely affect our
prospects.
Michael
C. Crapps, our president and chief executive officer, has extensive and
long-standing ties within our primary market area and substantial experience
with our operations, and he has contributed significantly to our growth.
If we lose the services of Mr. Crapps, he would be difficult to replace and
our
business and development could be materially and adversely
affected.
Our
success also depends, in part, on our continued ability to attract and retain
experienced loan originators, as well as other management personnel. Competition
for personnel is intense, and we may not be successful in attracting or
retaining qualified personnel. Our failure to compete for these personnel,
or
the loss of the services of several of such key personnel, could adversely
affect our growth strategy and seriously harm our business, results of
operations, and financial condition.
We
are subject to extensive regulation that could limit or restrict our
activities.
We
operate in a highly regulated industry and are subject to examination,
supervision, and comprehensive regulation by various regulatory agencies.
Our compliance with these regulations is costly and restricts certain of our
activities, including payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, interest rates paid on deposits,
and locations of offices. We are also subject to capitalization guidelines
established by our regulators, which require us to maintain adequate capital
to
support our growth.
The
laws
and regulations applicable to the banking industry could change at any time,
and
we cannot predict the effects of these changes on our business and
profitability. Because government regulation greatly affects the business
and financial results of all commercial banks and bank holding companies, our
cost of compliance could adversely affect our ability to operate
profitably.
The
Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated
by
the Securities and Exchange Commission that are now applicable to us, have
increased the scope, complexity, and cost of corporate governance, reporting,
and disclosure practices. To comply with the Sarbanes-Oxley Act, we have
previously hired
outside
consultant to assist with our internal audit and internal control functions.
We
have experienced, and we expect to continue to experience, greater compliance
costs, including costs related to internal controls, as a result of the
Sarbanes-Oxley Act.
Our
continued pace of growth may require us to raise additional capital in the
future, but that capital may not be available when it is
needed.
We
are
required by regulatory authorities to maintain adequate levels of capital to
support our operations. To support our continued growth, we may need to
raise additional capital. Our ability to raise additional capital, if
needed, will depend in part on conditions in the capital markets at that time,
which are outside our control. Accordingly, we cannot assure you of our
ability to raise additional capital, if needed, on terms acceptable to us.
If we cannot raise additional capital when needed, our ability to further expand
our operations through internal growth and acquisitions could be materially
impaired. In addition, if we decide to raise additional equity capital,
your interest could be diluted.
We
face strong competition for clients, which could prevent us from obtaining
clients and may cause us to pay higher interest rates to attract
clients.
The
banking business is highly competitive, and we experience competition in our
market from many other financial institutions. We compete with commercial
banks, credit unions, savings and loan associations, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market funds, and other mutual funds, as well as other super-regional,
national, and international financial institutions that operate offices in
our
primary market areas and elsewhere. We compete with these institutions
both in attracting deposits and in making loans. In addition, we have to
attract our client base from other existing financial institutions and from
new
residents. Many of our competitors are well-established, larger financial
institutions. These institutions offer some services, such as extensive
and established branch networks, that we do not provide. There is a risk
that we will not be able to compete successfully with other financial
institutions in our market, and that we may have to pay higher interest rates
to
attract deposits, resulting in reduced profitability. In addition,
competitors that are not depository institutions are generally not subject
to
the extensive regulations that apply to us.
We
will face risks with respect to expansion through acquisitions or
mergers.
Our
acquisition of DeKalb Bankshares and The Bank of Camden is currently pending.
If
the merger is completed, we face a risk that the expected cost savings and
any
revenue synergies from the merger may not be fully realized within the expected
timeframes, or that disruption from the merger may make it more difficult to
maintain relationships with our or DeKalb’s customers, employees, or suppliers.
In addition, from time to time we may seek to acquire other financial
institutions or parts of those institutions. We may also expand into new
markets or lines of business or offer new products or services. These
activities would involve a number of risks, including:
•
the
potential inaccuracy of the estimates and judgments used to evaluate credit,
operations, management, and market risks with respect to a target
institution;
•
the
time
and costs of evaluating new markets, hiring or retaining experienced local
management, and opening new offices and the time lags between these activities
and the generation of sufficient assets and deposits to support the costs of
the
expansion;
•
the
incurrence and possible impairment of goodwill associated with an acquisition
and possible adverse effects on our results of operations; and
•
the
risk
of loss of key employees and customers.
Item
1B. Unresolved SEC Staff Comments.
None.
Item
2. Description of Property.
Lexington
Property.
The
principal place of business of both the company and our main office is located
at 5455 Sunset Boulevard, Lexington, South Carolina 29072. The site of the
bank’s main office is a 2.29 acre plot of land. The site was purchased for
$576,000. We are operating in an 8,500 square foot facility located on
this site. In October 2000, the bank acquired an additional 2.0 acres
adjacent to the existing facility for approximately $300,000 for future
expansion. This site was designed to allow for 24,000 to 48,000 square
foot facility at some future date. The bank has begun construction of a 28,000
square foot administrative center on the additional 2.0 acres. The total
construction cost for the building is approximately $3.4 million. At December
31, 2005 the company had disbursed
approximately
$1.4 million under the terms of the contract. It is anticipated the facility
will be completed in July 2006.
Forest
Acres Property.
We
operate a branch office facility at 4404 Forest Drive, Columbia, South Carolina
29206. The Forest Acres site is .71 acres. The banking facility is
approximately 4,000 square feet with a total cost of land and facility
approximately $920,000.
Irmo
Property.
We
operate a branch office facility at 1030 Lake Murray Boulevard, Irmo, South
Carolina 29063. The Irmo site is approximately 1.00 acre. The
banking facility is approximately 3,200 square feet with a total cost of land
and facility of approximately $1.1 million.
Cayce/West
Columbia Property.
We
operate a branch office facility at 506 Meeting Street, West Columbia, South
Carolina, 29169. The Cayce/West Columbia site is approximately 1.25
acres. The banking facility is approximately 3,800 square feet with a
total cost of land and facility of approximately $935,000.
Gilbert
Property. We
operate a branch office at 4325 Augusta Highway Gilbert, South Carolina
29054. The facility is an approximate 3000 square foot facility located on
an approximate one acre lot. The total cost of the land and facility was
approximately $768,000.
Chapin
Office. We
operate a branch office facility at 137 Amicks Ferry Rd., Chapin, South Carolina
29036. The facility is approximately 2,200 square feet and is located on a
three
acre lot. The total cost of the facility and land was approximately
$695,000. The bank has entered into a contract to build a 3,000 square foot
facility on the same property to replace the existing 2,200 square foot modular
building. The total construction cost is approximately $650,000. At December
31,
2005 approximately $590,000 has been disbursed under the terms of the contract.
The new facility was completed in February 2006.
Northeast
Columbia.
We
operate a branch office facility at
9822
Two Notch Rd, Columbia, South Carolina 29223.
The
facility is approximately 3,000 square feet and is located on a 1.0 acre
lot. The total cost of the facility and land was approximately $1.2
million.
College
Street. We
operate a branch office at 1323 College Street, Newberry, South Carolina
29108. This banking office was acquired in connection with the DutchFork
merger. The banking facility is approximately 3,500 square feet and is
located on a .65 acre lot. The total cost of the facility and land was
approximately $365,000.
Prosperity
Property.
We operate a branch office at 101 N. Wheeler Avenue, Prosperity, South Carolina
29127. This office was acquired in connection with the DutchFork
merger. The banking facility is approximately 1,300 square feet and is
located on a .31 acre lot. The total cost of the facility and land was
approximately $175,000.
Wilson
Road. We
operate a branch office at 1735 Wilson Road, Newberry, South Carolina
29108. The banking office was acquired in connection with the DutchFork
merger. This banking facility is approximately 12,000 square feet and is
located on a 1.56 acre lot. Adjacent to the branch facility is a 13,000
square foot facility which was formerly utilized as the DutchFork operations
center. The total cost of the facility and land was approximately $3.3
million.
Redbank
Property. We
operate a branch office facility at 1449 Two Notch Road, Lexington, South
Carolina 29073. This branch opened for operation on February 3,
2005. The facility is approximately 3,000 square feet and is located on a
1.0 acre lot. The total cost of the facility and land was approximately
$1.3 million.
Highway
219 Property. A
.61
acre lot located on highway 219 in Newberry County was acquired in connection
with the DutchFork merger. This lot may be used for a future branch
location but no definitive plans have been made. The cost of the lot was
$430,000.
Neither
the company nor the bank is a party to, nor is any of their property the subject
of, any material pending legal proceedings related to the business of the
company or the bank.
No
matter
was submitted to a vote of security holders during the fourth quarter of the
fiscal year covered by this report.
As
of
March 1, 2006, there were approximately 1,190 shareholders of record of our
common stock. On January 15, 2003, our stock began trading on The NASDAQ Capital
Market under the trading symbol of “FCCO.” Prior to January 15, 2003, our
stock was quoted on the OTC Bulletin Board under the trading symbol
“FCCO.OB.” The following table sets forth the high and low sales price
information as reported by NASDAQ in 2005 and 2004, and the dividends per share
declared on our common stock in each such quarter. All information has
been adjusted for any stock splits and stock dividends effected during the
periods presented.
|
|
|
High
|
|
Low
|
|
Dividends
|
|
||||
|
|
|
|
|
|
|
|
|
||||
|
2005
|
|
|
|
|
|
|
|
||||
|
Quarter
ended March 31, 2005
|
|
$
|
21.75
|
|
$
|
18.80
|
|
$
|
0.05
|
|
|
|
Quarter
ended June 30, 2005
|
|
$
|
20.49
|
|
$
|
17.75
|
|
$
|
0.05
|
|
|
|
Quarter
ended September 30, 2005
|
|
$
|
20.45
|
|
$
|
18.50
|
|
$
|
0.05
|
|
|
|
Quarter
ended December 31, 2005
|
|
$
|
20.50
|
|
$
|
18.45
|
|
$
|
0.05
|
|
|
|
2004
|
|
|
|
|
|
|
|
||||
|
Quarter
ended March 31, 2004
|
|
$
|
24.50
|
|
$
|
21.75
|
|
$
|
0.05
|
|
|
|
Quarter
ended June 30, 2004
|
|
$
|
24.00
|
|
$
|
20.50
|
|
$
|
0.05
|
|
|
|
Quarter
ended September 30, 2004
|
|
$
|
22.97
|
|
$
|
20.00
|
|
$
|
0.05
|
|
|
|
Quarter
ended December 31, 2004
|
|
$
|
20.70
|
|
$
|
18.30
|
|
$
|
0.05
|
|
|
We
expect
comparable dividends to be paid to the shareholders for the foreseeable
future. Notwithstanding the foregoing, the future dividend policy of the
company is subject to the discretion of the board of directors and will depend
upon a number of factors, including future earnings, financial condition, cash
requirements, and general business conditions. Our ability to pay dividends
is
generally limited by the ability of our
subsidiary
bank to pay dividends to us. As
a
national bank, our bank may only pay dividends out of its net profits then
on
hand, after deducting expenses, including losses and bad debts. In
addition, the bank is prohibited from declaring a dividend on its shares of
common stock until its surplus equals its stated capital, unless there has
been
transferred to surplus no less than one-tenth of the bank’s net profits of the
preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC will be required if the total of all
dividends declared in any calendar year by the bank exceeds the bank’s net
profits to date, as defined, for that year combined with its retained net
profits for the preceding two years less any required transfers to
surplus. At December 31, 2005, the bank had $6.3 million free of these
restrictions. The OCC also has the authority under federal law to enjoin a
national bank from engaging in what in its opinion constitutes an unsafe or
unsound practice in conducting its business, including the payment of a dividend
under certain circumstances.
Item
6. Selected Financial Data
|
First
Community Corporation
|
||||||||||||||||
|
Selected
Financial Data
|
||||||||||||||||
|
(Amounts
in thousands, except per share data)
|
||||||||||||||||
|
|
Year
ended December 31,
|
|||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
Operations
Statement Data:
|
||||||||||||||||
|
Net
interest income
|
$
|
12,994
|
$
|
9,596
|
$
|
7,648
|
$
|
7,044
|
$
|
5,523
|
||||||
|
Provision
for loan losses
|
329
|
245
|
167
|
677
|
407
|
|||||||||||
|
Non-interest
income
|
3,298
|
1,774
|
1,440
|
1,232
|
938
|
|||||||||||
|
Non-interest
expense
|
11,838
|
7,977
|
6,158
|
5,377
|
4,381
|
|||||||||||
|
Income
taxes
|
1,032
|
963
|
965
|
758
|
569
|
|||||||||||
|
Net
income
|
$
|
3,093
|
$
|
2,185
|
$
|
1,797
|
$
|
1,464
|
$
|
1,104
|
||||||
|
Per
Share Data:
|
||||||||||||||||
|
Net
income diluted (1)
|
$
|
1.04
|
$
|
1.09
|
$
|
1.08
|
$
|
0.90
|
$
|
$
$ 0.68
|
||||||
|
Cash
dividends
|
.20
|
0.20
|
0.19
|
0.12
|
-
|
|||||||||||
|
Book
value at period end (1)
|
17.82
|
18.09
|
12.21
|
11.61
|
10.56
|
|||||||||||
|
Tangible
book value at period end (1)
|
8.34
|
8.19
|
11.74
|
11.02
|
9.85
|
|||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Total
assets
|
$
|
467,455
|
$
|
455,706
|
$
|
215,029
|
$
|
195,201
|
$
|
156,555
|
||||||
|
Loans,
net
|
221,668
|
184,007
|
119,304
|
98,466
|
86,518
|
|||||||||||
|
Securities
|
176,372
|
196,026
|
58,954
|
69,785
|
46,366
|
|||||||||||
|
Deposits
|
349,604
|
337,064
|
185,259
|
168,062
|
134,402
|
|||||||||||
|
Shareholders'
equity
|
50,767
|
50,463
|
19,509
|
18,439
|
16,776
|
|||||||||||
|
Average
shares outstanding (1)
|
2,847
|
1,903
|
1,590
|
1,588
|
1,585
|
|||||||||||
|
Performance
Ratios:
|
||||||||||||||||
|
Return
on average assets
|
0.67
|
%
|
0.76
|
%
|
0.88
|
%
|
0.82
|
%
|
0.77
|
%
|
||||||
|
Return
on average equity
|
6.12
|
%
|
8.00
|
%
|
9.49
|
%
|
8.35
|
%
|
8.00
|
%
|
||||||
|
Return
on average tangible equity
|
13.33
|
%
|
10.39
|
%
|
9.94
|
%
|
8.87
|
%
|
7.40
|
%
|
||||||
|
Net
interest margin
|
3.30
|
%
|
3.72
|
%
|
4.02
|
%
|
4.26
|
%
|
4.19
|
%
|
||||||
|
Dividend
payout ratio
|
18.35
|
%
|
17.39
|
%
|
16.81
|
%
|
13.04
|
%
|
N/A
|
|||||||
|
Asset
Quality Ratios:
|
||||||||||||||||
|
Allowance
for loan losses to period
|
||||||||||||||||
|
end
total loans
|
1.22
|
%
|
1.48
|
%
|
1.41
|
%
|
1.53
|
%
|
1.14
|
%
|
||||||
|
Allowance
for loan losses to
|
||||||||||||||||
|
non-performing
assets
|
487.48
|
%
|
2,291.34
|
%
|
2,123.60
|
%
|
1,059.24
|
%
|
247.00
|
%
|
||||||
|
Non-performing
assets to total assets
|
.12
|
%
|
.03
|
%
|
.04
|
%
|
.07
|
%
|
0.26
|
%
|
||||||
|
Net
charge-offs (recoveries) to average loans
|
.19
|
%
|
.13
|
%
|
(.01
|
%)
|
.16
|
%
|
0.35
|
%
|
||||||
|
Capital
and Liquidity Ratios:
|
||||||||||||||||
|
Tier
1 risk-based capital
|
13.24
|
%
|
12.91
|
%
|
13.21
|
%
|
14.03
|
%
|
14.90
|
%
|
||||||
|
Total
risk-based capital
|
14.12
|
%
|
13.86
|
%
|
14.42
|
%
|
15.28
|
%
|
15.90
|
%
|
||||||
|
Leverage
ratio
|
9.29
|
%
|
8.51
|
%
|
8.87
|
%
|
8.77
|
%
|
10.00
|
%
|
||||||
|
Equity
to assets ratio
|
10.86
|
%
|
9.60
|
%
|
9.07
|
%
|
9.45
|
%
|
10.72
|
%
|
||||||
|
Average
loans to average deposits
|
59.81
|
%
|
61.00
|
%
|
63.33
|
%
|
60.71
|
%
|
68.66
|
%
|
||||||
|
(1)
Adjusted for the June 30, 2001 5% stock dividend and
the February 28, 2002 5-for-4 stock split.
|
||||||||||||||||
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
First
Community Corporation is a one bank holding company headquartered in Lexington,
South Carolina. We operate from our
main
office in Lexington, South Carolina and our 11 full-service offices are located
in Lexington (two), Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin,
Northeast Columbia, Prosperity, and Newberry (two).
During
the fourth quarter of 2004,
we
completed our first acquisition of another financial institution when we merged
with DutchFork Bancshares,
Inc.,
the holding company for Newberry Federal Savings Bank. The
merger added three offices in Newberry County. We engage in a general commercial
and retail banking business characterized by personalized service and local
decision making, emphasizing the banking needs of small to medium-sized
businesses, professional concerns and individuals.
During
2005, we continued to implement our strategy to fully leverage the DutchFork
acquisition. We experienced significant loan growth of 18.7%,
or
$34.9 million. This was particularly important since in planning the merger
with
DutchFork management considered the need to leverage the existing deposit base
in Newberry County through quality growth in the loan portfolio. This growth
was
funded by deposit growth of approximately 3.7%, or $12.5 million, along with
cash flow generated from a decrease in the size of the investment portfolio.
During the fourth quarter of 2004 and first quarter of 2005, we restructured
much of the investment portfolio in order to provide the needed cash flow to
fund loan growth. Total assets grew to $467.5 million, loans to $221.7 million
and deposits to $349.6 million at December 31, 2005.
Our
net
income increased $908,000 in 2005, or 41.6%, over the year ended December 31,
2004. The increase was attributable to having the operation of the DutchFork
acquisition included for a full year in 2005 as compared to only three months
during 2004. Net income was $3.1 million, or $1.04 diluted earnings per share
in
2005, compared to $2.2 million, or $1.09 diluted earnings per share in 2004.
The
following discussion describes
our
results of operations for 2005 as compared to 2004 (and 2004 compared to 2003)
and also analyzes our financial condition as of December 31, 2005 as compared
to
December 31, 2004. Like most community banks, we derive most of our income
from
interest we receive on our loans and investments. A 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.
We
have
included a number of tables to assist in our description of these measures.
For
example, the “Average Balances” table shows the average balance during
2005,
2004 and 2003
of
each category of our assets and liabilities, as well as the yield we earned
or
the rate we paid with respect to each category. A review of this table shows
that our loans typically provide higher interest yields than do other types
of
interest earning assets, which is why we intend to channel a substantial
percentage of our earning assets into our loan portfolio. Similarly, the
“Rate/Volume Analysis” table helps demonstrate the impact of changing interest
rates and changing volume of assets and liabilities during the years shown.
We
also track the sensitivity of our various categories of assets and liabilities
to changes in interest rates, and we have included a “Sensitivity Analysis
Table” to help explain this. Finally, we have included a number of tables that
provide detail about our investment securities, our loans, and our deposits
and
other borrowings.
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, as well as several tables describing our
allowance for loan losses and the allocation of this allowance among our various
categories of loans.
In
addition to earning interest on our loans and investments, we earn income
through fees and other expenses we charge to our customers. We describe the
various components of this noninterest income, as well as our noninterest
expense, in the following discussion. The
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.
Mergers
On
October
1, 2004, we completed our merger with DutchFork Bancshares, Inc.
Pursuant to the merger,
we issued 1,169,898 shares of common stock valued at $27.3 million and paid
$18.3 million to
shareholders of DutchFork. Other costs
related to the merger included stock
options valued at $2.6 million and direct acquisition costs of $1.1 million.
The
fair value of assets
acquired
at the date of acquisition was $224.2 million,
including $24.2 million in goodwill and $2.9 million in core deposit intangible.
The fair value of liabilities assumed amounted to $174.9 million. The results
of
operations for the year ended December 31, 2005 include a full year of the
results of the merger with DutchFork as compared to three months for the year
ended December 31, 2004. Due to the relative asset size of DutchFork as compared
to First Community Corporation, the comparison of the results of operations
between the various periods is significantly impacted by the merger.
On
January 19, 2006, we announced that we had signed a definitive agreement to
acquire DeKalb Bankshares, Inc., the holding company for the Bank of Camden.
The
agreement provides, among other things, that DeKalb will merge with and into
First Community with First Community as the surviving entity. Immediately
following the merger, the Bank of Camden will merge with and into First
Community Bank, N.A., with First Community Bank, N.A. being the surviving
entity. Pursuant to the agreement, each share of DeKalb common stock issued
and
outstanding immediately before the effective date (as defined in the agreement)
will be converted into the right to receive $3.875 in cash and 0.60705 shares
of
First Community common stock. Assuming no DeKalb shareholders exercise
dissenters’ rights, and assuming the total number of outstanding shares of
DeKalb common stock immediately prior to the effective time is 610,139, First
Community will issue an aggregate of 370,384 shares of stock and $2,364,289
in
cash. The
boards of directors of both parties have approved the merger agreement, and
the
merger agreement and the transactions contemplated thereby are subject to the
approval of the shareholders DeKalb, regulatory approvals, and other customary
closing conditions.
Results
of Operations
Our
net
income was $3.1 million, or $1.04 diluted earnings per share, for the year
ended
December 31, 2005, as compared to net income of $2.2 million, or $1.09 diluted
earnings per share, for the year ended December 31, 2004, and $1.8 million,
or
$1.08 diluted earnings per share for the year ended December 31, 2003. The
increase in net income for 2005 as compared to 2004 resulted primarily from
an
increase in the level of average earning assets of $136.0 million. The effect
of
the increase in earning assets was offset by a decrease in the net interest
margin from 3.72% during 2004 to 3.30% during 2005. On a tax equivalent basis,
the net interest margin was 3.44% and 3.82% for the years ended December 31,
2005 and 2004, respectively. Net interest spread, the difference between the
yield on earning assets and the rate paid on interest-bearing liabilities,
was
3.05% in 2005 as compared to 3.46% in 2004 and 3.71% in 2003. Net interest
income increased from $9.6 million in 2004 to $13.0 million for the year ended
December 31, 2005. The provision for loan losses was $329,000 in 2005 as
compared to $245,000 in 2004. Non-interest income increased from $1.8 million
in
2004 to $3.3 million in 2005 due primarily to increased deposit service charges
resulting from higher average deposit account balances.
In
addition, there were gains on sale of securities of $188,000 in 2005 as compared
to $11,000 in 2004. Non-interest expense increased to $11.8
million in 2005 as compared to $8.0 million in 2004. This increase is
attributable to increases in all expense categories required to support the
continued growth of
the
bank.
The
increase in net income from
2003
to 2004
resulted primarily from
an
increase in the level of average earning assets of $67.6 million,
which
was
partially offset by a decrease in the net interest margin from 4.02% in 2003
compared to 3.72% in 2004. Earning assets averaged $257.9
million in 2004 as compared to $190.3 million in 2003. Non-interest income
increased from $1.4 million in 2003 to $1.8 million in 2004 due to increased
deposit service charges and increases in ATM/debit card fees and ATM surcharge
fees. Non-interest expense increased to $8.0 million in 2004 as compared to
$6.2
million in 2003. This increase
is
attributable to increases in all expense categories required to support the
continued growth of the bank as well as expenses related to the operations
of
the branches acquired in the DutchFork acquisition on October 1,
2004.
Net
Interest Income
Net
interest income is our primary source of revenue. Net interest income is the
difference between income earned on assets and interest paid on deposits and
borrowings used to support such assets. Net interest income is determined by
the
rates earned on our interest-earning assets and the rates paid
on
our interest-bearing liabilities, the relative amounts of interest-earning
assets and interest-bearing liabilities, and the degree of mismatch and the
maturity and repricing characteristics of its interest-earning assets and
interest-bearing liabilities.
Net
interest income totaled $13.0 million in 2005, $9.6 million in 2004 and $7.6
million in 2003. The yield on earning assets, which was 5.27% in 2003, decreased
to 5.06% in 2004 and increased to 5.42% in 2005. The rate paid on
interest-bearing liabilities was 1.56% in 2003, 1.60% in 2004 and 2.37% in
2005.
The net
interest margin was 4.02% in 2003, 3.72% in 2004 and 3.30% in 2005. The
continued decrease in net interest margin in 2005 as compared to 2004 was a
result of a smaller rise in average yields on interest earning assets relative
to the rise in the average cost of interest-bearing liabilities. The flattening
of the yield curve as well as a very competitive deposit and lending environment
also contributed the decline in the net interest margin. As a result of the
acquisition of DutchFork,
our
loan to deposit ratio on average during 2005 was 59.8%, slightly lower then
the
61.0% during 2004. Loans typically provide a higher yield than 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 which should improve the overall
yield on earning assets and the net interest margin. At December 31, 2005,
the
loan to deposit ratio had increased to 63.4%.
The
yield
on earning assets increased by 36 basis points in 2005 as compared to 2004
whereas, the cost of interest-bearing funds increased by 77 basis points during
the same period. The higher increase in the cost of funds as compared to yield
on interest earning assets was due to the higher reliance on borrowed funds
in
2005 as compared to 2004. The average borrowed funds to total interest
bearing-liabilities in 2003 was 5.2%, as compared to 11.4% and 19.2% in 2004
and
2005, respectively. During 2004, we borrowed $15.0 million in long-term debt
to
facilitate the merger with DutchFork and acquired $35.0 million in Federal
Home
Loan Bank advances as a result of the merger. These longer term borrowed funds
typically have a higher interest rate than our mix of deposit products. This
contributed to the increases in the rates paid on interest-bearing liabilities
from 1.56%, 1.60% and 2.37% in 2003, 2004 and 2005 respectively. The increased
reliance on borrowed funds contributed to the decline in the net interest margin
to 3.30% in 2005 as compared to 3.72% and 4.02% in 2004 and 2003, respectively.
Average
Balances, Income Expenses and Rates.
The
following tables depict, for the periods indicated, certain information related
to our average balance sheet and our average yields on assets and
average
costs of
liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
|
(In
thousands)
|
Year
ended December 31,
|
|||||||||||||||||||||||||||
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||
|
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
|||||||||||||||||||
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Earning
assets
|
||||||||||||||||||||||||||||
|
Loans
|
$
|
202,143
|
$
|
13,608
|
6.73
|
%
|
$
|
141,793
|
$
|
9,063
|
6.39
|
%
|
$
|
111,928
|
$
|
7,582
|
6.77
|
%
|
||||||||||
|
Securities
|
184,057
|
7,465
|
4.06
|
%
|
92,933
|
3,647
|
3.92
|
%
|
60,261
|
2,267
|
3.76
|
%
|
||||||||||||||||
|
Other
short-term investments (2)
|
7,670
|
271
|
3.54
|
%
|
23,167
|
334
|
1.44
|
%
|
18,089
|
179
|
0.99
|
%
|
||||||||||||||||
|
Total
earning assets
|
393,871
|
21,344
|
5.42
|
%
|
257,893
|
13,044
|
5.06
|
%
|
190,278
|
10,028
|
5.27
|
%
|
||||||||||||||||
|
Cash
and due from banks
|
10,456
|
8,425
|
6,626
|
|||||||||||||||||||||||||
|
Premises
and equipment
|
14,710
|
9,740
|
7,440
|
|||||||||||||||||||||||||
|
Other
assets
|
42,724
|
12,173
|
2,195
|
|||||||||||||||||||||||||
|
Allowance
for loan losses
|
(2,774
|
)
|
(2,063
|
)
|
(1,744
|
)
|
||||||||||||||||||||||
|
Total
assets
|
$
|
458,987
|
$
|
286,168
|
$
|
204,795
|
||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||||||
|
Interest-bearing
transaction accounts
|
$
|
55,289
|
187
|
0.34
|
%
|
$
|
36,906
|
66
|
0.30
|
%
|
$
|
31,892
|
66
|
0.21
|
%
|
|||||||||||||
|
Money
market accounts
|
41,615
|
829
|
1.99
|
%
|
29,568
|
284
|
0.96
|
%
|
25,122
|
231
|
0.92
|
%
|
||||||||||||||||
|
Savings
deposits
|
31,988
|
214
|
0.67
|
%
|
22,070
|
155
|
0.70
|
%
|
12,041
|
84
|
0.70
|
%
|
||||||||||||||||
|
Time
deposits
|
156,131
|
4,513
|
2.89
|
%
|
102,322
|
2,180
|
2.13
|
%
|
75,.391
|
1,927
|
2.56
|
%
|
||||||||||||||||
|
Other
borrowings
|
67,941
|
2,606
|
3.84
|
%
|
24,596
|
719
|
2.92
|
%
|
7,855
|
72
|
0.92
|
%
|
||||||||||||||||
|
Total
interest-bearing liabilities
|
352,964
|
8,349
|
2.37
|
%
|
215,462
|
3,448
|
1.60
|
%
|
152,301
|
2,380
|
1.56
|
%
|
||||||||||||||||
|
Demand
deposits
|
52,964
|
41,663
|
32,304
|
|||||||||||||||||||||||||
|
Other
liabilities
|
2,536
|
1,573
|
1,243
|
|||||||||||||||||||||||||
|
Shareholders'
equity
|
50,522
|
27,470
|
18,947
|
|||||||||||||||||||||||||
|
Total
liabilities and shareholders' equity
|
$
|
458,986
|
$
|
286,168
|
$
|
204,795
|
||||||||||||||||||||||
|
Net
interest spread
|
3.05
|
%
|
3.46
|
%
|
3.71
|
%
|
||||||||||||||||||||||
|
Net
interest income/margin
|
$
|
12,994
|
3.30
|
%
|
$
|
9,596
|
3.72
|
%
|
$
|
7,648
|
4.02
|
%
|
||||||||||||||||
|
(1)
All loans and deposits are domestic. Average loan balances include
non-accrual loans
|
||||||||||||||||||||||||||||
|
(2)
The computation includes federal funds sold, securities purchased
under
agreement to resell and interest bearing
deposits.
|
||||||||||||||||||||||||||||
The
following table presents the dollar amount of changes in interest income and
interest expense attributable to changes in volume and the amount attributable
to changes in rate. The combined effect in both volume and rate, which cannot
be
separately identified, has been allocated proportionately to the change due
to
volume and due to rate.
| (In thousands) | |||||||||||||||||||
|
2005
versus 2004
|
2004
versus 2003
|
||||||||||||||||||
|
Increase
(decrease ) due
to
|
Increase
(decrease ) due
to
|
||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Earning
assets
|
|||||||||||||||||||
|
Loans
|
$
|
4,092
|
$
|
453
|
$
|
4,545
|
$
|
1,929
|
$
|
(448
|
)
|
$
|
1,481
|
||||||
|
Investment
securities
|
3,700
|
118
|
3,818
|
1,287
|
93
|
1,380
|
|||||||||||||
|
Other
short-term investments (1)
|
(
326
|
)
|
262
|
(
64
|
)
|
14
|
141
|
155
|
|||||||||||
|
Total
earning assets
|
7,445
|
854
|
8,299
|
3,435
|
(419
|
)
|
3,016
|
||||||||||||
|
Interest-bearing
liabilities
|
|||||||||||||||||||
|
Interest-bearing
transaction accounts
|
65
|
12
|
77
|
8
|
36
|
44
|
|||||||||||||
|
Money
market accounts
|
150
|
394
|
544
|
42
|
11
|
53
|
|||||||||||||
|
Savings
deposits
|
67
|
(7
|
)
|
60
|
71
|
1
|
72
|
||||||||||||
|
Time
deposits
|
2,418
|
(85
|
)
|
2,333
|
610
|
(357
|
)
|
253
|
|||||||||||
|
Other
short term borrowings
|
1,603
|
284
|
1,887
|
321
|
325
|
646
|
|||||||||||||
|
Total
interest-bearing liabilities
|
6,394
|
(1,493
|
)
|
4,901
|
1,013
|
55
|
1,068
|
||||||||||||
|
Net
interest income
|
$
|
3,398
|
$
|
1,948
|
|||||||||||||||
Market
Risk and Interest Rate Sensitivity
Market
risk reflects the risk of economic loss resulting from adverse changes in market
prices and interest rates. The risk of loss can be measured in either diminished
current market values or reduced current and potential net income. Our primary
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 its assets and liabilities
in
order to diminish the potential adverse impact that changes in interest rates
could have on its net interest income. The ALCO has established policies
guidelines and strategies with respect to interest rate risk exposure and
liquidity.
A
monitoring technique employed by us is the measurement of our 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 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. Neither the “gap” analysis
or asset/liability modeling are precise indicators of our interest sensitivity
position due to the many factors that affect net interest income including
changes in the volume and mix of earning assets and interest-bearing
liabilities.
The
following table illustrates our interest rate sensitivity at December 31,
2005.
Interest
Sensitivity Analysis
(In
thousands
|
Within
|
One
to
|
Three
to
|
Over
|
|||||||||||||
|
One
Year
|
Three
Years
|
Five
Years
|
Five
Years
|
Total
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Earning
assets
|
||||||||||||||||
|
Loans
(1)
|
$
|
115,297
|
$
|
55,128
|
$
|
49,355
|
$
|
1,787
|
$
|
221,567
|
||||||
|
Securities
|
50,858
|
46,480
|
49,586
|
35,100
|
182,024
|
|||||||||||
|
Federal
funds sold, securities
|
||||||||||||||||
|
purchased under agreements to
|
||||||||||||||||
|
resell
and other earning assets
|
1,162
|
-
|
-
|
-
|
1,162
|
|||||||||||
|
Total
earning assets
|
167,317
|
101,608
|
98,941
|
36,887
|
404,753
|
|||||||||||
|
Liabilities
|
||||||||||||||||
|
Interest
bearing liabilities
|
||||||||||||||||
|
Interest
bearing deposits
|
||||||||||||||||
|
NOW
accounts
|
15,188
|
27,340
|
9,114
|
9,113
|
60,755
|
|||||||||||
|
Money
market accounts
|
21,967
|
23,616
|
-
|
-
|
45,583
|
|||||||||||
|
Savings
deposits
|
8,946
|
12,524
|
4,174
|
4,174
|
29,818
|
|||||||||||
|
Time
deposits
|
107,338
|
23,633
|
25,130
|
20
|
156,121
|
|||||||||||
|
Total
interest-bearing deposits
|
153,439
|
87,113
|
38,418
|
13,307
|
292,277
|
|||||||||||
|
Other
borrowings
|
30,939
|
5,251
|
27,306
|
467
|
63,963
|
|||||||||||
|
Total
interest-bearing liabilities
|
184,378
|
92,364
|
65,724
|
13,774
|
356,240
|
|||||||||||
|
Period
gap
|
($
17,061
|
)
|
$
|
9,244
|
$
|
33,217
|
$
|
23,113
|
$
|
48,513
|
||||||
|
Cumulative
gap
|
($
17,061
|
)
|
($
7,817
|
)
|
$
|
25,400
|
$
|
48,513
|
$
|
48,513
|
||||||
|
Ratio
of cumulative gap to total
|
||||||||||||||||
|
earning
assets
|
(4.22
|
%)
|
(1.93
|
%)
|
6.28
|
%
|
11.99
|
%
|
11.99
|
%
|
||||||
|
(1)
|
Loans
classified as non-accrual as of December 31, 2005 are not included
in the
balances.
|
|
(2)
|
Securities
based on amortized cost.
|
We
are
currently liability sensitive within one year. However, our gap analysis is
not
a precise indicator of our interest sensitivity position. The analysis presents
only a static view of the timing of maturities and repricing opportunities,
without taking into consideration that changes in interest rates do not affect
all assets and liabilities equally. Net
interest income is also
impacted
by other significant factors, including changes in the volume and mix of earning
assets and interest-bearing liabilities. The GAP analysis includes the carrying
amounts of interest rate sensitive assets and liabilities in the periods in
which they next reprice to market rates or mature. To reflect anticipated
prepayments, certain asset and liability categories are shown in the table
using
estimated cash flows rather than contractual cash flows.
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
counterparty 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 December 31, 2005, the market value of this cap was $193,000. Any
gain or loss on the value of this contract is recognized in earnings on a
current basis. We have not received any payments under the terms of the
contract. During the year ended December 31, 2005, we recognized $37,500 in
other income to reflect the increase in the value of the contract
Through
simulation modeling, management monitors 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 12 months. Based
on
the many factors and assumptions used in simulating
the effect of changes in interest rates,
the
following table estimates the hypothetical percentage change in net interest
income at December 31, 2005 and 2004 over the subsequent 12 months.
Net
Interest Income Sensitivity
|
Change
in
short-term
interest
rates
|
Hypothetical
percentage
change in
net
interest income
December
31,
|
|
|
2005
|
2004
|
|
|
+200bp
|
+
0.74%
|
+
1.56%
|
|
+100bp
|
+
0.75%
|
+
0.96%
|
|
Flat
|
-
|
-
|
|
-100bp
|
-
2.79%
|
-
6.44%
|
|
-200bp
|
-
8.30%
|
-
14.33%
|
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 in
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
December 31, 2005 and 2004 the PVE, exposure in a plus 200 basis point increase
in market interest rates was estimated to be 8.03% and 6.5%,
respectively.
Provision
and Allowance for Loan Losses
At
December 31, 2005, the allowance for loan losses amounted to $2.7 million,
or
1.22% of total loans, as compared to $2.8 million, or 1.48% of total loans,
at
December 31, 2004. Our provision for loan loss was $329,000 for the year ended
December 31, 2005 as compared to $245,000 and $167,000 for the years ended
December 31, 2004 and 2003, respectively. The provisions are made based on
our
assessment of general loan loss risk and asset quality. The allowance for loan
losses represents an amount which we believe will be adequate to absorb probable
losses on existing loans that may become uncollectible. Our judgment as to
the
adequacy of the allowance for loan losses is based on a number of assumptions
about future events, which we believe to be reasonable, but which may or may
not
prove to be accurate. Our determination of the allowance for loan losses is
based on evaluations of the 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 and concentrations of credit. Periodically, we
adjust the amount of the allowance based on changing circumstances. We charge
recognized losses to the allowance and add subsequent recoveries back to the
allowance for loan losses.
We
perform an analysis quarterly to assess the risk within the loan portfolio.
The
portfolio is segregated into similar risk components for which historical loss
ratios are calculated and adjusted for identified changes in current portfolio
characteristics. Historical loss ratios are calculated by product type and
by
regulatory credit risk classification. The
allowance
consist 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
December 31, 2005, 2004, and 2003, we had non-accrual loans in the amount of
$101,000, $0, and $80,000,
respectively. There
were $387,000, $411,000 and $96,000 in loans delinquent greater than 30 days
at
December 31, 2005, 2004 and 2003, respectively. There were $39,000, $80,000
and
$109,000 in loans greater than 90 days delinquent and still accruing interest
at
December 31, 2005, 2004 and 2003, respectively. As
a
result of the merger with DutchFork, we acquired an allowance for loan losses
in
the amount of $995,000. This allowance for loan losses had been recorded through
the provision for loan losses for DutchFork prior to the merger, which was
consummated on October 1, 2004.
Our
management continuously monitors non-performing, classified and past due loans,
to identify deterioration regarding the condition of these loans. We identified
four loans in the amount of $618,000 which are current as to principal and
interest and not included in non-performing assets but that could be potential
problem loans.
Allowance
for Loan Losses
(Dollars
in thousands)
|
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
Average
loans outstanding
|
$
|
202,143
|
$
|
141,793
|
$
|
111,928
|
$
|
93,992
|
$
|
79,466
|
||||||
|
Loans
outstanding at period end
|
$
|
221,668
|
$
|
186,771
|
$
|
121,009
|
$
|
99,991
|
$
|
87,519
|
||||||
|
Total
nonaccrual loans
|
$
|
101
|
-
|
$
|
80
|
$
|
144
|
$
|
404
|
|||||||
|
Loans
past due 90 days and still accruing
|
$
|
34
|
$
|
80
|
$
|
109
|
$
|
24
|
$
|
-
|
||||||
|
Beginning
balance of allowance
|
$
|
2,764
|
$
|
1,705
|
$
|
1,525
|
$
|
1,000
|
$
|
873
|
||||||
|
Loans
charged-off:
|
||||||||||||||||
|
1-4
family residential mortgage
|
119
|
5
|
27
|
-
|
7
|
|||||||||||
|
Home
equity
|
274
|
-
|
-
|
-
|
-
|
|||||||||||
|
Commercial
|
56
|
196
|
157
|
156
|
270
|
|||||||||||
|
Installment
& credit card
|
72
|
93
|
51
|
16
|
7
|
|||||||||||
|
Total
loans charged-off
|
521
|
294
|
235
|
172
|
284
|
|||||||||||
|
Recoveries:
|
||||||||||||||||
|
1-4
family residential mortgage
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Home
equity
|
-
|
-
|
-
|
19
|
-
|
|||||||||||
|
Commercial
|
99
|
90
|
247
|
1
|
4
|
|||||||||||
|
Installment
& credit card
|
30
|
23
|
1
|
-
|
-
|
|||||||||||
|
Total
recoveries
|
129
|
113
|
248
|
20
|
4
|
|||||||||||
|
Net
loans charged off (recovered)
|
392
|
181
|
(
13
|
)
|
152
|
280
|
||||||||||
|
Provision
for loan losses
|
329
|
245
|
167
|
677
|
407
|
|||||||||||
|
Purchased
in acquisition
|
-
|
995
|
-
|
-
|
-
|
|||||||||||
|
Balance
at period end
|
$
|
2,701
|
$
|
2,764
|
$
|
1,705
|
$
|
1,525
|
1,000
|
|||||||
|
Net
charge -offs to average loans
|
0.19
|
%
|
0.13
|
%
|
(0.01
|
%)
|
0.16
|
%
|
0.35
|
%
|
||||||
|
Allowance
as percent of total loans
|
1.22
|
%
|
1.48
|
%
|
1.41
|
%
|
1.53
|
%
|
1.14
|
%
|
||||||
|
Non-performing
loans as % of total loans
|
.05
|
%
|
-
|
0.07
|
%
|
0.14
|
%
|
0.46
|
%
|
|||||||
|
Allowance
as % of non-performing loans
|
2674.26
|
%
|
-
|
2123.60
|
%
|
1059.03
|
%
|
247.52
|
%
|
|||||||
The
following table presents an estimated allocation of the allowance for loan
losses at the end of each of the past three years. The allocation is calculated
on an approximate basis and is not necessarily indicative of future losses
or
allocations. The entire amount is available to absorb losses occurring in any
category of loans. Prior to December 31, 2003, we did not allocate the allowance
to loan losses to categories of loans but rather evaluated the allowance on
an
overall portfolio basis. The change as of December 31, 2003 to allocating the
allowance to loan losses to loan categories had no financial statement effect
on
the allowance for loan losses.
Allocation
of the Allowance
for Loan Losses
Dollars
in thousands
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Amount
|
%
of
loans
in
category
|
Amount
|
%
of
loans
in
category
|
Amount
|
%
of
loans
in
category
|
||||||||||||||
|
Commercial,
Financial and Agricultural
|
$
|
574
|
10.0
|
%
|
$
|
462
|
10.2
|
%
|
$
|
167
|
9.5
|
%
|
|||||||
|
Real
Estate Construction
|
611
|
9.0
|
%
|
348
|
4.3
|
%
|
214
|
6.4
|
%
|
||||||||||
|
Real
Estate Mortgage:
|
|
||||||||||||||||||
|
Commercial
|
953
|
50.9
|
%
|
1,285
|
51.8
|
%
|
792
|
60.1
|
%
|
||||||||||
|
Residential
|
275
|
16.8
|
%
|
478
|
19.0
|
%
|
293
|
9.8
|
%
|
||||||||||
|
Consumer
|
213
|
13.3
|
%
|
135
|
14.7
|
%
|
85
|
14.2
|
%
|
||||||||||
|
Unallocated
|
75
|
N/A
|
56
|
N/A
|
36
|
N/A
|
|||||||||||||
|
Total
|
$
|
2,701
|
100.0
|
%
|
$
|
2,764
|
100.0
|
%
|
$
|
1,705
|
100.0
|
%
|
|||||||
Accrual
of interest is discontinued on loans when we believe, 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.
Noninterest
Income and Expense
Noninterest
Income.
Our
primary source of noninterest income is service charges on deposit accounts.
In
addition, we originate mortgage loans that are pre-sold and funded by the third
party acquirer and we receives a fee. Other sources of noninterest
income
are
derived from commissions on sale of non-deposit investment products, bankcard
fees, ATM/debit card fees, commissions on check sales, safe deposit box rent,
wire transfer and official check fees. Noninterest
income for the year ended December
31, 2005
was $3.3 million as compared to $1.8 million for
2004, an
increase of $1.5 million, or
85.9%.
This increase is due
primarily to increased deposit service charges resulting from higher average
deposit account balances.
Deposit
service
charges amounted to $1.5 million in 2005 as compared to $880,000 in 2004. During
the fourth quarter of 2005, we introduced a formalized overdraft privilege
program which contributed to the increase in deposit service charges. Mortgage
origination fees increased to $362,000 in 2005 as compared to $268,000 in 2004.
This increase resulted from an emphasis in this area and the addition of one
full time and one part-time originator in the last half of 2005. We had gains
on
the sale of securities in the amount of $188,000 in 2005 as compared to $11,000
in 2004. Gains in the amount of $181,000 were recognized in the first quarter
of
2005 as we continued to restructure the investment portfolio acquired from
DutchFork. A gain on the early extinguishment of debt in the amount of $124,000
was realized in the fourth quarter of 2005. This resulted from the pay down
of
approximately $5.0 million of the FHLB advances that were acquired in the
DutchFork merger. Other noninterest income increased to $1.2 million in 2005
as
compared to $615,000 in 2004. This is a result of all categories of other
noninterest income increasing, including loan late charges, ATM/debit card
fees
and surcharges due to the effect of the DutchFork merger. In addition, we
realized an increase in the cash value of bank owned life insurance of
approximately $251,000 in 2005 as compared to $19,000 in 2004. These policies
were acquired in the DutchFork acquisition and were owned for the entire year
of
2005
as
compared to only three months in 2004.
Noninterest
income amounted to $1.4 million in 2003. The increase in 2004 of
$334,000, or
23.2%,
as
compared to 2003 is also primarily attributable to increased deposit account
balances and the related deposit account fees. Deposit account fees increased
$179,000,
or 25.6%,
in 2004
as compared to 2003. ATM/debit
card fees and ATM surcharge fees increased approximately $80,000 in 2004 as
compared to 2003. This increase resulted from installing ATM’s at all branch
locations as well as increased usage in card activity as a result of increases
in numbers of accounts. Mortgage
loan fees decreased
approximately $76,000 from $343,000 in 2003 to $268,000 in 2004. Despite
interest rates remaining at relatively low levels, the refinancing level of
the
prior two years was not maintained throughout 2004. As
a
result of the merger
with
DutchFork
in
October 2004,
noninterest income
for
three
new
offices
was
included in the results of operation for the last quarter of 2004.
Noninterest
Expense.
In the
very competitive financial services industry, we recognize the need to place
a
great deal of emphasis on expense management and continually evaluates and
monitors growth in discretionary expense categories in order to control future
increases. We have expanded our branch network over the last five years and
opened our eleventh office in February 2005. Along with this branch expansion,
we have continued to improve the support infrastructure to enable our company
to
effectively manage the growth experienced over the last
five
years. As
a
result of the merger
with
DutchFork in
October 2004, expenses associated with operating the three
new
offices
were
included in the results of
operations for the last quarter of 2004 and the full year in 2005. As a result
of
management’s expansion strategy, all categories of noninterest expense have
continued to increase over the last several years. We anticipate that we will
continue to seek de novo branch expansion as well as possible acquisition
opportunities in key markets within the midlands of South Carolina.
Noninterest
expense increased to $11.8 million for the year
ended
December 31, 2005 from $8.0 million for the year ended December 31, 2004. Salary
and employee benefits increased $2.0 million in 2005 as compared to
2004.
We
added
approximately
30
employees
in
connection with the merger with DutchFork. These
employees were included in operations for three months during 2004 and for
the
full year in 2005. The number of full time equivalent employees at December
31,
2005 was 123 as compared to 115 at the same time in 2004. These other new
employees were hired to support the continued growth of the bank.
Occupancy expense increased $318,000 from $489,000 in 2004 to $807,000 in 2005.
Equipment expense increased by $254,000,
or
25.6%,
in
2005 as
compared to
2004.
This is primarily a result of the expenses associated with the DutchFork
acquisition being included for an entire year in 2005. In addition, increased
depreciation and maintenance contract expense related to equipment purchased
to
upgrade and improve existing technology,
including an upgrade to our main processor and item processing equipment needed
to support increased volumes subsequent to the merger with DutchFork. These
additions and upgrades were made in the second and third quarter of 2004 and
therefore did not impact the full year of 2004. We continue to evaluate our
technology systems in order to enhance our delivery of services. Noninterest
expense in 2005,
2004 and 2003 included amortization of the deposit premium intangible of
$595,000,
$213,000 and $179,000, respectively,
related
to the merger with DutchFork in October 2004
and
the acquisition of the Chapin office in February 2001. The deposit premiums
of
$1.2 million relative to the Chapin branch acquisition and the $2.9 million
related to the
DutchFork merger are being amortized
on a
straight-line
basis over a period of seven years.
Other
noninterest expense increased to $2.6 million in 2005 as compared to $1.7
million in 2004. Substantially
all areas in this category increased due to the growth the company experienced
as a result of the merger with DutchFork. Professional
fees increased by $225,000 in 2005 as compared to 2004 due to increased legal
fees, audit fees and consulting fees, most of which is attributable to the
significant growth we experienced between the two periods. In addition, the
Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated by the
Securities and Exchange Commission that are now applicable to us, have increased
the scope, complexity, and cost of corporate governance, reporting, and
disclosure. To comply with certain aspects of the Sarbanes-Oxley Act,
particularly Section 404, we hired an outside consultant to assist with certain
documentation and testing of internal control functions. The Securities and
Exchange Commission has granted an extension to non-accelerated filers to comply
with the provisions of Section 404 to December 31, 2007. A significant portion
of the documentation and consulting work was performed in 2005 in anticipation
of having to comply as of an earlier implementation date. The direct cost
relative to this work was approximately $35,000 in 2005. There will be continued
cost incurred relative to complying with the requirements of Section 404 into
2006 and beyond. We continue to evaluate the best options for utilizing
consulting/outside resources for implementation and compliance with the
requirements of Section 404.
Noninterest
expense increased to $8.0 million for the year ended December 2004 from $6.2
million for the year ended December 31, 2003. Salary and employee benefit
expense increased $957,000
in 2004 as compared to
2003.
This increase resulted from an increase of 45 full time equivalent employees
from 70 at December 31, 2003 to 115 at December 31, 2004.
Approximately 30 of these employees were added October 1, 2004 as a result
of
the DutchFork merger. Equipment expense increased by $188,000 in 2004 as
compared to 2004. This is primarily attributable to increased depreciation
and
maintenance contract expense related to equipment purchased to upgrade and
improve technology. Marketing
and public relations expense for 2004 as compared to 2003 increased by $52,000
as a result of planned increases in advertising.
The
following table sets forth for the periods indicated the primary components
of
non-interest expense:
|
(In
thousands)
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Salary
and employee benefits
|
$
|
6,292
|
$
|
4,263
|
$
|
3,307
|
||||
|
Occupancy
|
807
|
489
|
395
|
|||||||
|
Equipment
|
1,246
|
992
|
803
|
|||||||
|
Marketing
and public relations
|
337
|
325
|
273
|
|||||||
|
Data
processing
|
199
|
127
|
87
|
|||||||
|
Supplies
|
262
|
191
|
126
|
|||||||
|
Telephone
|
291
|
206
|
147
|
|||||||
|
Correspondent
services
|
167
|
140
|
78
|
|||||||
|
Insurance
|
246
|
149
|
141
|
|||||||
|
Professional
fees
|
415
|
190
|
194
|
|||||||
|
Postage
|
164
|
111
|
85
|
|||||||
|
Amortization
of intangibles
|
595
|
280
|
179
|
|||||||
|
Other
|
817
|
514
|
343
|
|||||||
|
$
|
11,838
|
$
|
7,977
|
$
|
6,158
|
|||||
Income
Tax Expense
Income
tax expenses for the year ended December 31, 2005 were $1.0 million, or 25.0%
of
income before taxes,
as
compared to $963,000,
or
30.6% of income before taxes, for the year ended December 31, 2004. Income
taxes
for 2003 were $965,000, or 34.9% of income before taxes. We recognize deferred
tax assets for future deductible amounts resulting from differences in the
financial statement and tax bases of assets and liabilities and operating loss
carry forwards. A valuation allowance is then established to reduce the deferred
tax asset to the level that it is more likely than not that the tax benefit
will
be realized. There are no valuation allowances established for deferred taxes
as
of December 31, 2005 and 2004. The decrease in the effective tax rate in 2005
over the prior year is primarily a result of non-taxable dividends received
on
preferred stock held in the available-for-sale portfolio as well as the
non-taxable increase in the cash surrender value of life insurance. These
investments were owned by DutchFork at the date of the merger. Subsequent to
the
merger and as a result of restructuring certain holdings within the
portfolio,
a
significant portion of the preferred stock holdings were sold in the fourth
quarter of 2004 and first quarter of 2005. As of December 31, 2005, we continue
to hold preferred stock with a fair value of $28.2 million in the available
for
sale portfolio and bank owned life insurance with a book value of $5.8 million
included in other assets. These holdings will continue to reduce the company’s
effective tax rate in future periods. The decrease in the effective tax rate
in
2004 as compared to 2003 was also a primarily a result of these assets being
held for the fourth quarter of 2004.
Financial
Position
Total
assets at December 31, 2005 were $467.5 million as compared to $455.7 million
at
December 31, 2004. Average earning assets increased to $393.9 million during
2005 from $257.9 million during 2004. Asset growth included
growth
in loans of
$34.9
million during 2005. Loans
at
December 31, 2005 were $221.7
as
compared to $186.8 million at December 31, 2004. Investment securities decreased
from $196.0 at December 31, 2004 to $176.4 million at December 31, 2005.
The
$11.8
million growth in assets was primarily funded by an increase in deposit account
balances of $12.5 million. Securities sold under agreements to repurchase
increased by $6.3 million at December 31, 2005 as compared to December 31,
2004.
Federal Home Loan Advances decreased by $8.0 million as of December 31, 2005
compared to December 31, 2004. Shareholders’
equity totaled $50.8 million
at December 31, 2005 as compared to $50.5 million at December 31, 2004. The
increase was a result of retained earnings of $2.5 million and proceeds from
issuance of stock under stock option plans and the dividend reinvestment plan
of
$580,000.
These increases were offset by an increase of the unrealized loss on
available-for-sale securities of $2.8 million during 2005.
Earning
Assets
Loans.
Loans
typically provide higher yields than the other types of earning assets, and
thus
one of
our goals is to have loans be the largest category of our earning assets. At
December 31, 2005, loans accounted for 55.5% of earning assets as compared
to
47.6% of earning assets at December 31, 2004. As
a
result of the merger with DutchFork,
the
ratio of loans to total earning assets decreased considerably from 2003 to
2004.
In evaluating the merger with DutchFork, we
considered the need to leverage the existing deposit base
in the
Newberry County market through quality growth of the loan portfolio. The 7.9%
increase in the ratio during 2005 demonstrates progress towards our asset mix
goals. The growth of the loan portfolio both in total dollars and as a
percentage of total earning assets will continue to be a major focus throughout
2006 and thereafter. 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 its asset mix goals without sacrificing asset
quality. Loans averaged $202.1 million during 2005, as compared to $141.8
million in 2004.
The
following table shows the composition of the loan portfolio by
category:
|
December
31,
|
||||||||||||||||
|
(In
thousands)
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
|
||||||||||||||||
|
Commercial,
financial & agricultural
|
$
|
22,091
|
$
|
19,001
|
$
|
11,518
|
$
|
10,688
|
$
|
12,408
|
||||||
|
Real
estate:
|
||||||||||||||||
|
Construction
|
19,955
|
8,066
|
7,782
|
7,533
|
10,146
|
|||||||||||
|
Mortgage
-
residential
|
37,251
|
35,438
|
11,804
|
11,055
|
9,272
|
|||||||||||
|
Mortgage
-
commercial
|
112,915
|
96,811
|
72,668
|
55,290
|
41,744
|
|||||||||||
|
Consumer
|
29,456
|
27,455
|
17,237
|
15,425
|
13,968
|
|||||||||||
|
Total
gross loans
|
221,668
|
186,771
|
121,009
|
99,991
|
87,518
|
|||||||||||
|
Allowance
for loan losses
|
(2,701
|
)
|
(2,764
|
)
|
(1,705
|
)
|
(1,525
|
)
|
(1,000
|
)
|
||||||
|
Total
net loans
|
$
|
218,967
|
$
|
184,007
|
$
|
119,303
|
$
|
98,466
|
$
|
86,518
|
||||||
In
the
context of this discussion, a real estate mortgage loan is defined as any loan,
other than loans for construction purposes, secured by real estate, regardless
of the purpose of the loan. We follow the common practice of financial
institutions in the company’s market area 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%. The principal
components of our loan portfolio, at year-end 2005 and 2004, were commercial
mortgage loans in the amount of $112.9 million and $96.8 million, representing
50.9% and 51.8% of the portfolio, respectively. Significant portions of these
commercial mortgage loans are made to finance owner-occupied real estate. We
continue to maintain a conservative philosophy regarding our underwriting
guidelines, and believes it will reduce the risk elements of the loan portfolio
through strategies that diversify the lending mix.
The
repayment of loans in the loan portfolio as they mature is a source of
liquidity. The following table sets forth the loans maturing within specified
intervals at December 31,
2005.
Loan
Maturity Schedule and Sensitivity to Changes in Interest
Rates
|
(In
thousands)
|
December
31, 2005
|
||||||||||||
|
|
Over
One
|
||||||||||||
|
One
Year
|
Year
Through
|
Over
|
|||||||||||
|
or
Less
|
Five
Years
|
Five
Years
|
Total
|
||||||||||
|
Commercial,
financial & agricultural
|
$
|
9,175
|
$
|
11,990
|
$
|
925
|
$
|
22,090
|
|||||
|
Real
estate - construction
|
16,132
|
3,824
|
-
|
19,956
|
|||||||||
|
All
other loan
|
26,658
|
113,628
|
39,336
|
179,622
|
|||||||||
|
$
|
51,965
|
$
|
129,442
|
$
|
40,261
|
$
|
221,668
|
||||||
|
Loans
maturing after one year with:
|
|||||||||||||
|
Fixed
interest rates
|
$
|
109,486
|
|||||||||||
|
Floating
interest rates
|
60,217
|
||||||||||||
|
$
|
169,703
|
||||||||||||
The
information presented in the above table is based on the contractual maturities
of the individual loans,
including loans
which
may be subject to renewal at their contractual maturity. Renewal of such loans
is subject to review and credit approval, as well as modification of terms
upon
their maturity.
Investment
Securities
The
investment securities portfolio is a significant component of our total earning
assets. Total securities averaged $184.1 million in 2005, as compared to $92.9
million in 2004. This represents 46.7% and 36.0% of the average earning assets
for the year ended December 31, 2005 and 2004, respectively. The investment
portfolio increased as a percent of average earning assets during
2005 as a result of the
merger
with DutchFork
in the
fourth quarter of 2004. At
December 31, 2005, the portfolio was 44.2% of earning assets. During the fourth
quarter of
2004,
and continuing into
the
first quarter of 2005, the combined portfolio
was
restructured. Although
the portfolio acquired from DutchFork
had a
large percentage of investments
with
variable interest rates,
the
investments did not provide significant cash flow. The objective of the
restructuring was to shorten the maturity and purchase investments that provided
ongoing cash flow. The proceeds from these sales were reinvested primarily
in
various
mortgage-backed securities and collateralized mortgage obligations. Although
shortening the life of the portfolio resulted
in a decrease in the overall yield in the portfolio, we believe that the
restructuring enables us to better manage the interest rate risk associated
with
interest rate volatility. In addition, our objective is to increase the size
of
the loan portfolio as a percentage of total earning assets and the restructured
portfolio provides the necessary cash flow to meet this objective.
In
the
fourth quarter of 2004, we acquired approximately $41.6 million in
collateralized -mortgage backed securities (CMO’s). Of these securities, $30.0
million were issued by agencies of the federal government and $11.6 million
were
non-agency securities. At December 31, 2005 we had mortgage backed securities
including collateralized mortgage obligations with a fair value of $69.8
million. Of these $39.2 million were issued by government agencies and $30.6
million are non-agency securities. We believe that none of the CMOs held at
December 31, 2005 are deemed to be invested in “high risk” tranches. Prior to
acquiring a CMO, we perform a detailed analysis of the changes in value and
the
impact on cash flows in a changing interest rate environment to ensure that
it
meets our investment objectives as outlined in our investment policies. At
December 31, 2005, we also had investments in variable rate preferred stock
issued by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal
National Mortgage Association (FNMA) with a fair value of $28.2 million, all
of
which were acquired in the DutchFork transaction. In addition, we acquired
other
fixed and variable rate preferred stocks issued by FHLMC and FNMA in the
DutchFork transaction. During the fourth quarter of 2004, we sold approximately
$33.0 million primarily fixed rate, preferred stock securities. As a result
of
marking the securities to market at the date of acquisition, substantially
no
gain or loss on those transactions was recognized in 2004. In the first quarter
of 2005, we sold preferred stock securities with an approximate carrying value
of $12.0 million. A gain of approximately $136,000 was realized in the first
quarter of 2005 on these sales. At December 31, 2005, the remaining five
different preferred stock securities owned have an average book value of 90%
of
their par value. All of these securities have adjustable rates.
Although
both of the issuing agencies have come under regulatory scrutiny relative to
accounting practices, there have been no significant downgrades in the credit
rating of the issuers. Given the adjustable rate nature of these securities,
the
dividend rate will adjust to a level more in line with current or future
interest rates at a preset time in the future. Our objective in the management
of the investment portfolio is to maintain a portfolio of high quality, liquid
investments. This policy is particularly important as we continue to emphasize
increasing the percentage of the loan portfolio to total earning assets. At
December 31, 2005, the estimated weighted average life of the
portfolio
was 9.6
years, duration of approximately 2.8 and a weighted average tax equivalent
yield
of approximately 4.58%. Based on our evaluation of securities that currently
have unrealized losses, and our ability and intent to hold these investments
until a recovery of fair value, we do not consider any of it investments to
be
other-than-temporarily impaired at December 31, 2005.
The
following table shows the investment portfolio composition.
(In
thousands)
|
December
31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Securities
available-for-sale at fair value:
|
||||||||||
|
U.S.
Treasury
|
$
|
992
|
$
|
997
|
$
|
3,027
|
||||
|
U.S.
Government agency
|
57,479
|
63,755
|
35,596
|
|||||||
|
Mortgage-backed
securities
|
69,794
|
71,056
|
14,395
|
|||||||
|
State
and local government
|
253
|
-
|
-
|
|||||||
|
FHLMC
and FNMA preferred stock
|
28,214
|
42,128
|
-
|
|||||||
|
Corporate
bonds
|
8,607
|
7,754
|
-
|
|||||||
|
Other
|
5,319
|
4,320
|
941
|
|||||||
|
170,658
|
190,010
|
53,959
|
||||||||
|
Securities
held-to-maturity (amortized cost):
|
||||||||||
|
State
and local government
|
5,654
|
6,006
|
4,985
|
|||||||
|
Other
|
60
|
10
|
10
|
|||||||
|
5,714
|
6,016
|
4,995
|
||||||||
|
Total
|
$
|
176,372
|
$
|
196,026
|
$
|
58,954
|
||||
The
following table shows, at carrying value, the scheduled maturities and average
yields of securities held at December 31, 2005.
|
(In
thousands)
|
|||||||||||||||||||||||||
|
December
31, 2005
|
|||||||||||||||||||||||||
|
After
One But
|
After
Five But
|
||||||||||||||||||||||||
|
Within
One Year
|
Within
Five Years
|
Within
Ten Years
|
After
Ten Years
|
||||||||||||||||||||||
|
Held-to-maturity:
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||
|
State
and local government
|
$
|
330
|
4.46
|
%
|
$
|
3,142
|
3.85
|
%
|
$
|
2,181
|
3.89
|
%
|
$
|
-
|
|
||||||||||
|
Other
|
-
|
|
10
|
5.85
|
%
|
50
|
4.05
|
%
|
|
|
|||||||||||||||
|
Total
investment securities held-to-
|
|||||||||||||||||||||||||
|
maturity
|
330
|
4.46
|
%
|
3,152
|
3.86
|
%
|
2,231
|
3.89
|
%
|
-
|
|
||||||||||||||
|
Available-for-sale:
|
|||||||||||||||||||||||||
|
U.S.
treasury
|
992
|
2.78
|
%
|
|
|
|
|||||||||||||||||||
|
U.S.
government agencies
|
13,271
|
3.21
|
%
|
32,208
|
3.76
|
%
|
10,513
|
4.22
|
%
|
1,487
|
4.37
|
%
|
|||||||||||||
|
Mortgage-backed
securities
|
12,479
|
4.69
|
%
|
44,197
|
4.37
|
%
|
6,204
|
4.01
|
%
|
6,914
|
5.71
|
%
|
|||||||||||||
|
State
and local government
|
253
|
4.15
|
%
|
||||||||||||||||||||||
|
FNMA
and FHLMC preferred stock
|
28,214
|
5.48
|
%
|
||||||||||||||||||||||
|
Corporate
|
1,998
|
4.41
|
%
|
4,149
|
7.26
|
%
|
2,460
|
4.54
|
%
|
||||||||||||||||
|
Other
|
5,319
|
4.10
|
%
|
||||||||||||||||||||||
|
Total
investment securities
|
|||||||||||||||||||||||||
|
available-for-sale
|
26,742
|
3.88
|
%
|
78,403
|
4.12
|
%
|
20,866
|
4.76
|
%
|
44,647
|
5.26
|
%
|
|||||||||||||
|
Total
investment securities
|
$
|
27,072
|
3.89
|
%
|
$
|
81,555
|
4.11
|
%
|
$
|
23,097
|
4.38
|
%
|
$
|
44,647
|
5.26
|
%
|
|||||||||
Investment
Securities Maturity Distribution and Yields
Short-Term
Investments
Short-term
investments, which consist of federal funds sold, securities purchased under
agreements to resell and interest bearing deposits, averaged $7.7 million
in 2005, as compared to $23.2 million in 2004. At December 31, 2005,
short-term investments totaled $1.1 million. These funds are a primary source
of
liquidity and are generally invested in an earning capacity on an overnight
basis.
Deposits
and Other Interest-Bearing Liabilities
Deposits.
Average
deposits were $338.0 million during 2005, compared to $232.5 million during
2004. Average interest-bearing deposits were $285.0 million in 2005, as compared
to $190.9 million in 2004.
The
following table sets forth the deposits by category:
|
(In
thousands)
|
December
31,
|
||||||||||||||||||
|
|
2005
|
2004
|
2003
|
||||||||||||||||
|
%
of
|
%
of
|
%
of
|
|||||||||||||||||
|
Amount
|
Deposits
|
Amount
|
Deposits
|
Amount
|
Deposits
|
||||||||||||||
|
Demand
deposit accounts
|
$
|
57,327
|
16.4
|
%
|
$
|
49,520
|
14.7
|
%
|
$
|
37,045
|
20.0
|
%
|
|||||||
|
NOW
accounts
|
60,756
|
17.4
|
%
|
59,723
|
17.7
|
%
|
33,660
|
18.2
|
%
|
||||||||||
|
Money
market accounts
|
45,582
|
13.0
|
%
|
39,124
|
11.6
|
%
|
23,355
|
12.6
|
%
|
||||||||||
|
Savings
accounts
|
29,819
|
8.5
|
%
|
35,370
|
10.5
|
%
|
11,223
|
6.0
|
%
|
||||||||||
|
Time
deposits less than $100,000
|
100,612
|
28.8
|
%
|
100,629
|
29.9
|
%
|
45,125
|
24.4
|
%
|
||||||||||
|
Time
deposits more than $100,000
|
55,508
|
15.9
|
%
|
52,698
|
15.6
|
%
|
34,850
|
18.8
|
%
|
||||||||||
|
$
|
349,604
|
100.0
|
%
|
$
|
337,064
|
100.0
|
%
|
$
|
185,258
|
100.0
|
%
|
||||||||
Core
deposits, which exclude certificates of deposit of $100,000 or more, provide
a
relatively stable funding source for the loan portfolio and other earning
assets. Core deposits were $294.1 million and $284.4 million at December 31,
2005 and 2004, respectively. A
stable
base of deposits
is
expected to continue be the primary source of funding to meet both our
short-term and long-term liquidity needs in the future. The
maturity distribution of time deposits is shown in the following
table.
Maturities
of Certificates of Deposit and Other Time Deposit of $100,000 or more
|
(In
thousands)
|
December
31, 2005
|
|||||||||||||||
|
After
Three
|
After
Six
|
After
|
||||||||||||||
|
Within
Three
|
Through
|
Through
|
Twelve
|
|||||||||||||
|
Months
|
Six
Months
|
Twelve
Months
|
Months
|
Total
|
||||||||||||
|
Certificates
of deposit of
|
||||||||||||||||
|
$100,000
or
more
|
$
|
12,622
|
$
|
8,514
|
$
|
17,017
|
$
|
17,355
|
$
|
55,508
|
||||||
There
were no other
time deposits of $100,000 or more at December 31, 2005.
Large
certificate of deposit customers tend to be extremely sensitive to interest
rate
levels, making these deposits less reliable sources of funding for liquidity
planning purposes than core deposits. Some financial institutions partially
fund
their balance sheets using large certificates of
deposits
obtained through brokers. These brokered deposits are generally expensive and
can be unreliable as long-term funding sources. Accordingly, we do not currently
accept brokered deposits.
Borrowed
funds.
Borrowed
funds consist of securities sold under agreements to repurchase, Federal Home
Loan Bank advances and long-term debt as a result of issuing $15.0 million
in
trust preferred securities.
Short-term borrowings in the form of securities sold under agreements to
repurchase averaged $11.0 million, $5.9 and $6.0 million during 2005, 2004
and
2003, respectively. The maximum month-end balance during 2005, 2004 and 2003
was
$14.9 million, $7.6 million and $8.2 million, respectively. The average rate
paid during these periods was 3.38%, 0.71% and 0.51%, respectively. The balance
of securities sold under agreements to repurchase were $13.8 million and $7.5
million at December 31, 2005 and 2004, respectively. The repurchase agreements
all mature within one to four days and are generally originated with customers
that have other relationships with the company and tend to provide a stable
and
predictable source of funding. As a member of the Federal Home Loan Bank of
Atlanta (FHLB Atlanta),
the bank
has access to advances from the FHLB Atlanta for various terms and amounts.
During 2005 and
2004,
the average outstanding advances amounted to $41.4 million and $13.4
million, respectively.
The
following is a schedule of the maturities for Federal Home Loan Bank Advances
as
of December 31, 2005 and 2004:
|
December
31,
|
|||||||||||||
|
(In
thousands)
|
2005
|
2004
|
|||||||||||
|
Maturing
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||
|
2005
|
$
|
-
|
-
|
$
|
2,500
|
2.08
|
%
|
||||||
|
2006
|
1,500
|
2.83
|
%
|
1,500
|
2.83
|
%
|
|||||||
|
2008
|
5,251
|
3.42
|
%
|
10,707
|
3.42
|
%
|
|||||||
|
2010
|
27,306
|
3.64
|
%
|
27,742
|
3.64
|
%
|
|||||||
|
After
five years
|
467
|
1.00
|
%
|
||||||||||
|
34,524
|
3.54
|
%
|
$
|
42,452
|
3.46
|
%
|
|||||||
Purchase
premiums included in advances acquired in the merger with DutchFork reflected
in
the advances maturing in 2008 and 2010 amount to $251,000 and $2.3
million,
respectively, at December 31, 2005. The coupon rate on these advances is 5.67%
and 5.76%, respectively. In addition to the above borrowings,
we
issued $15.0 million in trust preferred securities on September
16,
2004. The securities accrue and pay distributions quarterly at a rate of LIBOR
plus 257 basis points. The debt may be redeemed in full anytime after September
16, 2009 with notice and mature on September 16, 2034.
Capital
Total
shareholders’ equity as of December 31, 2005 was $50.8
million as compared to $50.5 million as of December 31, 2004. This increase
was
attributable to retained net income for the year ended December 31, 2005 of
$2.5
million offset by an increase in the net unrealized loss of $2.8 million net
of
tax effect in the market value of investment securities available-for
sale.
During
2005 and
2004, we paid
quarterly cash
dividends of $.05 per share. We paid a $.04 per share dividend in the first
quarter of 2003 and $.05 per share dividends for the second through the fourth
quarter of 2003. A
dividend reinvestment plan was implemented in the third quarter of 2003. The
plan allows existing shareholders the option of reinvesting cash dividends
as
well as making optional purchases of up to $5,000 in the purchase of common
stock per quarter.
Under
the
capital guidelines of the Federal Reserve and the OCC, the company and the
bank
are currently required to maintain a minimum risk-based total capital ratio
of
8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common
shareholders’ equity, qualifying perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, less goodwill. In
addition, the bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital
to total assets) of at least 4%, but this minimum ratio is increased by 100
to
200 basis points for other than the highest-rated institutions. The trust
preferred securities in the amount of $15.0 million that were issued on
September 16, 2004 qualify as tier 1 capital under the regulatory guidelines
and
are
included in the amounts reflected below. As noted above under “Supervision and
Regulation section - Capital Regulations,” the Federal Reserve is changing the
rules relating to when a company would become subject to these minimum capital
regulations. The new rules go into effect March 30, 2006 and exempt from these
requirements certain bank holding companies which have less than $500 million
in
total assets. It is unclear at this point whether our company will qualify
under
this exemption.
The
company and the bank exceeded their regulatory capital ratios
at
December 31, 2005 and 2004, as set forth in the following table.
|
Analysis
of Capital
|
|||||||||||||||||||
|
(In
thousands)
|
Required
|
Actual
|
Excess
|
||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||
|
The
Bank:
|
|||||||||||||||||||
|
December
31, 2005
|
|||||||||||||||||||
|
Risk
Based Capital
|
|||||||||||||||||||
|
Tier
1
|
$
|
12,320
|
4.0
|
%
|
$
|
36,179
|
11.8
|
%
|
$
|
23,859
|
7.8
|
%
|
|||||||
|
Total
Capital
|
24,640
|
8.0
|
%
|
38,880
|
12.6
|
%
|
14,240
|
4.6
|
%
|
||||||||||
|
Tier
1
Leverage
|
17,740
|
4.0
|
%
|
36,179
|
8.2
|
%
|
18,439
|
4.2
|
%
|
||||||||||
|
December
31, 2004
|
|||||||||||||||||||
|
Risk
Based Capital
|
|||||||||||||||||||
|
Tier
1
|
$
|
11,576
|
4.0
|
%
|
$
|
33,158
|
11.5
|
%
|
$
|
21,582
|
6.5
|
%
|
|||||||
|
Total
Capital
|
23,152
|
8.0
|
%
|
35,922
|
12.4
|
%
|
12,770
|
4.4
|
%
|
||||||||||
|
Tier
1
Leverage
|
17,367
|
4.0
|
%
|
33,158
|
7.6
|
%
|
15,791
|
3.6
|
%
|
||||||||||
|
The
Company:
|
|||||||||||||||||||
|
December
31, 2005
|
|||||||||||||||||||
|
Risk
Based Capital
|
|||||||||||||||||||
|
Tier
1
|
$
|
12,354
|
4.0
|
%
|
$
|
40,898
|
13.2
|
%
|
$
|
28,544
|
8.2
|
%
|
|||||||
|
Total
Capital
|
24,709
|
8.0
|
%
|
43,599
|
14.1
|
%
|
18,890
|
6.1
|
%
|
||||||||||
|
Tier
1
Leverage
|
17,616
|
4.0
|
%
|
40,898
|
9.3
|
%
|
23,282
|
5.3
|
%
|
||||||||||
|
December
31, 2004
|
|||||||||||||||||||
|
Risk
Based Capital
|
|||||||||||||||||||
|
Tier
1
|
$
|
11,612
|
4.0
|
%
|
$
|
37,485
|
12.9
|
%
|
$
|
25,873
|
8.2
|
%
|
|||||||
|
Total
Capital
|
23,224
|
8.0
|
%
|
40,249
|
13.9
|
%
|
17,025
|
5.9
|
%
|
||||||||||
|
Tier
1
Leverage
|
17,614
|
4.0
|
%
|
37,485
|
8.5
|
%
|
19,871
|
4.5
|
%
|
||||||||||
Liquidity
Management
Liquidity
management involves monitoring sources and uses of funds in order to meet its
day-to-day cash flow requirements while maximizing profits. Liquidity represents
our ability to convert assets into cash or cash equivalents without significant
loss and to raise additional funds by increasing liabilities. Liquidity
management is made more complicated because different balance sheet components
are subject to varying degrees of management control. For example, the timing
of
maturities of the investment portfolio is very predictable and subject to a
high
degree of control at the time investment decisions are made. However, net
deposit inflows and outflows are far less predictable and are not subject to
nearly the same degree of control. Asset liquidity is provided by cash and
assets which are readily marketable, or which can be pledged, or which will
mature in the near future. Liability liquidity is provided by access to core
funding sources, principally the ability to generate customer deposits in our
market area. In addition, liability liquidity is provided through the ability
to
borrow against approved lines of credit (federal funds purchased) from
correspondent banks and to borrow on a secured basis through securities sold
under agreements to repurchase. The bank is a member of the FHLB Atlanta and
has
the ability to obtain advances for various periods of time. These advances
are
secured by securities pledged by the bank or assignment of loans within the
bank’s portfolio.
With
the
successful completion of the common stock offering in
1995,
the secondary offering completed in July 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
of
the company and the bank needed for operations. Our funds sold and short-term
interest bearing deposits, its primary source of liquidity, averaged $7.7
million during the year ended December 31, 2005. The bank maintains federal
funds purchased lines, in the amount of $10.0 million with several financial
institutions, although these were not utilized in 2005. The FHLB Atlanta has
approved a line of credit of up to 15% of the bank assets which would be
collateralized by a pledge against specific investment securities and or
eligible loans. We regularly review the liquidity position of the company and
have implemented internal policies establishing guidelines for sources of asset
based liquidity and limit the total amount of purchased funds used to support
the balance sheet and
funding
from non core sources. We believe that our existing stable base of core deposits
along with continued growth in this deposit base will enable us to meet our
long
term liquidity needs successfully.
CONTRACTUAL
OBLIGATIONS
The
following table provides payments due by period for various contractual
obligations as of December 31, 2005
(in
thousands)
|
|
||||||||||||||||||||||
|
|
Payments
Due by Period
|
|||||||||||||||||||||
|
|
|
Over
One
|
Over
Two
|
Over
Three
|
After
|
|
||||||||||||||||
|
|
Within
|
to
Two
|
to
Three
|
to
Five
|
Five
|
|
||||||||||||||||
|
|
One
Year
|
Years
|
Years
|
Years
|
Years
|
Total
|
||||||||||||||||
|
|
|
|||||||||||||||||||||
|
Certificate
accounts
|
$
|
107,141
|
$
|
19,082
|
$
|
4,632
|
$
|
25,266
|
$ | $ |
156,121
|
|||||||||||
|
Short-term
borrowings
|
13,975
|
|
|
|
|
13,975
|
||||||||||||||||
|
Long-term
debt
|
1,500
|
5,251
|
27,308
|
15,464
|
49,523
|
|||||||||||||||||
|
Purchases
|
2,000
|
|
|
|
2,000
|
|||||||||||||||||
|
Total
contractual obligations
|
$
|
124,616
|
$
|
19,082
|
$
|
9,883
|
$
|
52,574
|
$
|
15,464
|
$
|
221,619
|
||||||||||
Off-Balance
Sheet Arrangements
In
the
normal course of operations, we engage in a variety of financial transactions
that, in accordance with generally accepted accounting principles, are not
recorded in the financial statements, or are recorded in amounts that differ
from the notional amounts. These transactions involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. Such transactions are
used by the company for general corporate purposes or for customer needs.
Corporate purpose transactions are used to help manage credit, interest rate,
and liquidity risk or to optimize capital. Customer transactions are used to
manage customers' requests for funding. Please
refer to Note 13 of the company’s financial statements for a discussion of our
off-balance sheet arrangements.
Impact
of Inflation
Unlike
most industrial companies, the assets and liabilities of financial institutions
such as the company and the bank are primarily monetary in nature. Therefore,
interest rates have a more significant effect on our performance than do the
effects of changes in the general rate of inflation and change in prices. In
addition, interest rates do not necessarily move in the same direction or in
the
same magnitude as the prices of goods and services. As discussed previously,
we
continually seek to manage the relationships between interest sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
Please
refer to “Market Risk and Interest Rate Sensitivity,” “Loan Maturity Schedule
and Sensitivity to Changes in Interest Rates,” “Investment Securities Majority
Distribution and Yields” in Item 6 for quantitative and qualitative disclosures
about market risk, which information is incorporated herein by reference.
Item
8. Financial Statements
and Supplementary Data.
The
following tables set forth certain unaudited historical quarterly financial
data
for each of the eight consecutive quarters in fiscal 2005 and 2004. This
information is derived from unaudited consolidated financial statements that
include, in our opinion, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation when read in conjunction with
our
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K.
(In
thousands, except per share data)
|
2005
|
Fourth
|
Third
|
Second
|
First
|
|||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||
|
Interest
Income
|
$
|
5,801
|
$
|
5,434
|
$
|
5,244
|
$
|
4,864
|
|||||
|
Net
interest income
|
3,359
|
3,206
|
3,260
|
3,170
|
|||||||||
|
Provision
for loan losses
|
112
|
79
|
72
|
66
|
|||||||||
|
Income
before income taxes
|
1,122
|
995
|
950
|
1,058
|
|||||||||
|
Net
income
|
854
|
752
|
707
|
780
|
|||||||||
|
Net
income per share, basic
|
0.30
|
0.26
|
0.25
|
0.28
|
|||||||||
|
Net
income per share , diluted
|
0.29
|
0.25
|
0.24
|
0.26
|
|||||||||
|
2004
|
|||||||||||||
|
Interest
Income
|
$
|
5,035
|
$
|
2,850
|
$
|
2,584
|
$
|
2,575
|
|||||
|
Net
interest income
|
3,399
|
2,167
|
2,006
|
2,023
|
|||||||||
|
Provision
for loan losses
|
7
|
40
|
64
|
66
|
|||||||||
|
Income
before income taxes
|
1,105
|
747
|
659
|
636
|
|||||||||
|
Net
income
|
839
|
493
|
431
|
422
|
|||||||||
|
Net
income per share, basic
|
0.30
|
0.31
|
0.27
|
0.26
|
|||||||||
|
Net
income per share , diluted
|
0.28
|
0.29
|
0.26
|
0.25
|
|||||||||
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
First
Community Corporation
Lexington,
South Carolina
I
have
audited the accompanying balance sheets of First Community Corporation as of
December 31, 2005 and 2004, and the related statements of operations,
changes in shareholders’ equity and comprehensive income (loss), and cash flows
for the three years ended December 31, 2005. These financial statements are
the responsibility of management. My responsibility is to express an opinion
on
these financial statements based on my audits.
I
conducted the audits in accordance with the standards of the Public Company
Accounting Oversight board (United States). Those standards require that I
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. I believe that my
audits provide a reasonable basis for my opinion.
In
my
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of First Community Corporation at
December 31, 2005 and 2004 and the results of its operations and its cash
flows for the three years ended December 31, 2005,
in
conformity with generally accepted accounting principles in the United States
of
America.
/s/Clifton
D. Bodiford
Clifton
D. Bodiford
Certified
Public Accountant
Columbia,
SC
January
13, 2006
|
FIRST
COMMUNITY CORPORATION
|
|||||||
|
|
|||||||
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
ASSETS
|
|
|
|||||
|
Cash
and due from banks
|
$
|
11,701,764
|
$
|
9,391,494
|
|||
|
Interest-bearing
bank balances
|
83,178
|
803,426
|
|||||
|
Federal
funds sold and securities purchased under
|
|
|
|||||
|
agreements
to
resell
|
1,079,204
|
9,130,725
|
|||||
|
Investment
securities - available for sale
|
170,657,770
|
190,010,307
|
|||||
|
Investment
securities - held to maturity (market value of
|
|||||||
|
$5,746,448
and
$6,147,698 at December 31,
|
|
|
|||||
|
2005
and 2004, respectively)
|
5,713,830
|
6,015,745
|
|||||
|
Loans
|
221,667,632
|
186,771,344
|
|||||
|
Less,
allowance for loan losses
|
2,700,647
|
2,763,988
|
|||||
|
Net
loans
|
218,966,985
|
184,007,356
|
|||||
|
Property,
furniture and equipment - net
|
15,982,029
|
14,313,090
|
|||||
|
Goodwill
|
24,256,020
|
24,256,020
|
|||||
|
Core
deposit intangible
|
2,767,074
|
3,361,815
|
|||||
|
Other
assets
|
16,247,239
|
14,416,034
|
|||||
|
Total
assets
|
$
|
467,455,093
|
$
|
455,706,012
|
|||
|
LIABILITIES
|
|||||||
|
Deposits:
|
|||||||
|
Non-interest
bearing demand
|
$
|
57,326,637
|
$
|
49,519,816
|
|||
|
NOW
and
money market accounts
|
106,337,887
|
98,846,828
|
|||||
|
Savings
|
29,818,705
|
35,370,267
|
|||||
|
Time
deposits less than $100,000
|
100,612,256
|
100,629,304
|
|||||
|
Time
deposits $100,000 and over
|
55,508,666
|
52,698,069
|
|||||
|
Total
deposits
|
349,604,151
|
337,064,284
|
|||||
|
Securities
sold under agreements to repurchase
|
13,806,400
|
7,549,900
|
|||||
|
Federal
Home Loan Bank Advances
|
34,524,409
|
42,452,122
|
|||||
|
Long
term debt
|
15,464,000
|
15,464,000
|
|||||
|
Other
borrowed money
|
169,233
|
184,593
|
|||||
|
Other
liabilities
|
3,120,115
|
2,528,424
|
|||||
|
Total
liabilities
|
416,688,308
|
405,243,323
|
|||||
|
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
|
|||||||
|
2,848,627
in
2005 and 2,788,902 in 2004
|
2,848,627
|
2,788,902
|
|||||
|
Additional
paid in capital
|
42,352,205
|
41,832,090
|
|||||
|
Retained
earnings
|
9,240,088
|
6,712,849
|
|||||
|
Accumulated
other comprehensive income
|
(3,674,135
|
)
|
(871,152
|
)
|
|||
|
Total
shareholders' equity
|
50,766,785
|
50,462,689
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
467,455,093
|
$
|
455,706,012
|
|||
|
FIRST
COMMUNITY CORPORATION
|
||||||||||
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Interest
and dividend income:
|
||||||||||
|
Loans,
including fees
|
$
|
13,607,962
|
$
|
9,063,092
|
$
|
7,581,751
|
||||
|
Investment
securities - available-for-sale
|
7,241,453
|
3,440,033
|
2,069,345
|
|||||||
|
Investment
securities - held-to-maturity
|
223,059
|
206,681
|
198,234
|
|||||||
|
Other
short term investments
|
271,276
|
334,518
|
179,030
|
|||||||
|
Total
interest and dividend income
|
21,343,750
|
13,044,324
|
10,028,360
|
|||||||
|
Interest
expense:
|
||||||||||
|
Deposits
|
5,743,340
|
2,729,459
|
2,307,974
|
|||||||
|
Securities
sold
under agreement to repurchase
|
275,738
|
40,934
|
29,704
|
|||||||
|
Other
borrowed money
|
2,330,252
|
677,830
|
42,934
|
|||||||
|
Total
interest expense
|
8,349,330
|
3,448,223
|
2,380,612
|
|||||||
|
Net
interest income
|
12,994,420
|
9,596,101
|
7,647,748
|
|||||||
|
Provision
for
loan losses
|
328,679
|
245,000
|
167,000
|
|||||||
|
Net
interest income after provision for loan losses
|
12,665,741
|
9,351,101
|
7,480,748
|
|||||||
|
Non-interest
income:
|
||||||||||
|
Deposit
service charges
|
1,462,111
|
879,585
|
700,359
|
|||||||
|
Mortgage
origination fees
|
361,856
|
267,972
|
343,472
|
|||||||
|
Gain
on
sale of securities
|
188,419
|
11,381
|
-
|
|||||||
|
Gain
on
early extinguishment of debt
|
124,436
|
-
|
-
|
|||||||
|
Other
|
1,161,095
|
614,783
|
395,973
|
|||||||
|
Total
non-interest income
|
3,297,917
|
1,773,721
|
1,439,804
|
|||||||
|
Non-interest
expense:
|
||||||||||
|
Salaries
and
employee benefits
|
6,292,239
|
4,263,383
|
3,306,714
|
|||||||
|
Occupancy
|
807,258
|
489,261
|
395,380
|
|||||||
|
Equipment
|
1,245,577
|
991,793
|
803,482
|
|||||||
|
Marketing
and
public relations
|
337,481
|
325,395
|
273,257
|
|||||||
|
Amortization
of
intangibles
|
594,741
|
279,685
|
178,710
|
|||||||
|
Other
|
2,561,091
|
1,627,470
|
1,200,638
|
|||||||
|
Total
non-interest expense
|
11,838,387
|
7,976,987
|
6,158,181
|
|||||||
|
Net
income before tax
|
4,125,271
|
3,147,835
|
2,762,371
|
|||||||
|
Income
taxes
|
1,032,600
|
962,850
|
964,890
|
|||||||
|
Net
income
|
$
|
3,092,671
|
$
|
2,184,985
|
$
|
1,797,481
|
||||
|
Basic
earnings per common share
|
$
|
1.09
|
$
|
1.15
|
$
|
1.13
|
||||
|
Diluted
earnings per common share
|
$
|
1.04
|
$
|
1.09
|
$
|
1.08
|
||||
|
|
||||||||||
|
See
Notes to Consolidated Financial
Statements
|
||||||||||
|
Consolidated
Statement of Changes in Shareholders’ Equity and Comprehensive Income
(loss)
|
|||||||||||||||||||
|
|
|||||||||||||||||||
|
|
|||||||||||||||||||
|
|
|||||||||||||||||||
|
|
Accumulated
|
||||||||||||||||||
|
Additional
|
|
Other
|
|||||||||||||||||
|
Shares
|
Common
|
Paid-in
|
Retained
|
Comprehensive
|
|||||||||||||||
|
Issued
|
Stock
|
Capital
|
Earnings
|
Income
(loss)
|
Total
|
||||||||||||||
|
Balance
December 31, 2002
|
1,587,970
|
$
|
1,587,970
|
$
|
12,771,383
|
$
|
3,414,234
|
$
|
665,136
|
$
|
18,438,723
|
||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Net
income
|
1,797,481
|
1,797,481
|
|||||||||||||||||
|
Accumulated
other comprehensive loss,
|
|||||||||||||||||||
|
net
of
income tax of $299,069
|
(526,003
|
)
|
(526,003
|
)
|
|||||||||||||||
|
Total
comprehensive income
|
1,271,478
|
||||||||||||||||||
|
Cash
dividend ($0.19 per share)
|
|
|
|
(301,973
|
)
|
(301,973
|
)
|
||||||||||||
|
Exercise
of stock options
|
6,923
|
6,923
|
45,909
|
52,832
|
|||||||||||||||
|
Dividend
reinvestment plan
|
2,331
|
2,331
|
45,423
|
|
|
47,754
|
|||||||||||||
|
Balance
December 31, 2003
|
1,597,224
|
1,597,224
|
12,862,715
|
4,909,742
|
139,133
|
19,508,814
|
|||||||||||||
|
Comprehensive
income
|
|||||||||||||||||||
|
Net
income
|
2,184,985
|
2,184,985
|
|||||||||||||||||
|
Accumulated
other comprehensive loss,
|
|||||||||||||||||||
|
net
of
income tax benefit of $540,016
|
(1,002,887
|
)
|
|
||||||||||||||||
|
Less:
reclassification adjustment for gains
|
|||||||||||||||||||
|
included
in net
income, net of tax of
|
|||||||||||||||||||
|
$3,983
|
(7,398
|
)
|
|||||||||||||||||
|
Other
comprehensive loss
|
|
(1,010,285
|
)
|
(1,010,285
|
)
|
||||||||||||||
|
Comprehensive
income
|
1,174,700
|
||||||||||||||||||
|
Cash
dividend ($0.20 per share)
|
(381,878
|
)
|
(381,878
|
)
|
|||||||||||||||
|
Stock
issued in acquisition
|
1,169,898
|
1,169,898
|
28,675,725
|
29,845,623
|
|||||||||||||||
|
Exercise
of stock options
|
15,409
|
15,409
|
205,365
|
220,774
|
|||||||||||||||
|
Dividend
reinvestment plan
|
6,371
|
6,371
|
88,285
|
|
|
94,656
|
|||||||||||||
|
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
|
3,092,671
|
3,092,671
|
|||||||||||||||||
|
Accumulated
other comprehensive loss,
|
|||||||||||||||||||
|
net
of
income tax benefit of $1,443,352
|
|
(2,680,511
|
)
|
|
|||||||||||||||
|
Less:
reclassification adjustment for gains
|
|||||||||||||||||||
|
included
in net
income, net of tax of
|
|||||||||||||||||||
|
$65,946
|
(122,472
|
)
|
|||||||||||||||||
|
Other
comprehensive loss
|
(2,802,983
|
)
|
(2,802,983
|
)
|
|||||||||||||||
|
Comprehensive
income:
|
289,688
|
||||||||||||||||||
|
Cash
dividend ($0.20 per share)
|
(565,432
|
)
|
(565,432
|
)
|
|||||||||||||||
|
Exercise
of stock options
|
52,845
|
52,845
|
399,814
|
452,659
|
|||||||||||||||
|
Dividend
reinvestment plan
|
6,880
|
6,880
|
120,301
|
|
|
127,181
|
|||||||||||||
|
Balance
December 31, 2005
|
2,848,627
|
$
|
2,848,627
|
$
|
42,352,205
|
$
|
9,240,088
|
$
|
(3,674,135
|
)
|
$
|
50,766,785
|
|||||||
|
See
Notes to Consolidated Financial
Statements
|
|||||||||||||||||||
|
FIRST
COMMUNITY CORPORATION
|
||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
3,092,671
|
$
|
2,184,985
|
$
|
1,797,481
|
||||
|
Adjustments
to reconcile net income to
|
||||||||||
|
net cash used in operating activities:
|
||||||||||
|
Depreciation
|
926,776
|
761,277
|
631,356
|
|||||||
|
Premium
amortization (Discount accretion)
|
(345,763
|
)
|
(93,782
|
)
|
225,564
|
|||||
|
Provision
for
loan losses
|
328,679
|
245,000
|
167,000
|
|||||||
|
Amortization
of
intangibles
|
594,741
|
279,685
|
178,710
|
|||||||
|
Gain
on
sale of other real estate owned
|
(29,983
|
)
|
(21,707
|
)
|
-
|
|||||
|
Gain
on
sale of securities
|
(188,418
|
)
|
(11,381
|
)
|
-
|
|||||
|
Gain
on
early extinguishment of debt
|
(124,436
|
)
|
-
|
-
|
||||||
|
(Increase)
decrease in other assets
|
(693,657
|
)
|
(425,079
|
)
|
109,035
|
|||||
|
Tax
benefit from exercise of stock options
|
-
|
51,621
|
-
|
|||||||
|
Increase
(decrease) in accounts payable
|
591,691
|
14,681
|
(68,241
|
)
|
||||||
|
Net
cash provided in operating activities
|
4,152,301
|
2,985,300
|
3,040,905
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Proceeds
from sale of securities available-for-sale
|
39,071,729
|
56,586,668
|
-
|
|||||||
|
Purchase
of investment securities available-for-sale
|
(51,368,761
|
)
|
(108,265,814
|
)
|
(39,509,065
|
)
|
||||
|
Maturity/call
of investment securities available-for-sale
|
27,267,768
|
36,424,205
|
49,297,109
|
|||||||
|
Purchase
of investment securities held-to-maturity
|
(50,000
|
)
|
(1,052,057
|
)
|
(767,685
|
)
|
||||
|
Maturity/call
of investment securities held-to-maturity
|
325,000
|
-
|
760,000
|
|||||||
|
Increase
in loans
|
(35,288,308
|
)
|
(14,813,202
|
)
|
(21,004,651
|
)
|
||||
|
Net
cash disbursed in business combination
|
-
|
(11,131,142
|
)
|
-
|
||||||
|
Proceeds
from sale of other real estate owned
|
401,733
|
23,800
|
-
|
|||||||
|
Purchase
of property and equipment
|
(
2,595,715
|
)
|
(2,427,322
|
)
|
(1,801,427
|
)
|
||||
|
Net
cash used in investing activities
|
(22,236,554
|
)
|
(44,654,864
|
)
|
(13,025,719
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Increase
in deposit accounts
|
12,539,867
|
16,996,662
|
17,195,399
|
|||||||
|
Proceeds
from issuance of long term debt
|
-
|
15,000,000
|
-
|
|||||||
|
Advances
from the Federal Home Loan Bank
|
19,580,000
|
-
|
5,000,000
|
|||||||
|
Repayment
of advances from the Federal Home Loan Bank
|
(26,752,661
|
)
|
(1,000,000
|
)
|
-
|
|||||
|
Increase
(decrease) in securities sold under agreements to
repurchase
|
6,256,500
|
3,608,900
|
(3,365,064
|
)
|
||||||
|
Increase
(decrease) in other borrowings
|
(15,360
|
)
|
24,517
|
(4,211
|
)
|
|||||
|
Proceeds
from exercise of stock options
|
452,659
|
169,153
|
52,832
|
|||||||
|
Dividend
reinvestment plan
|
127,181
|
94,656
|
47,754
|
|||||||
|
Cash
dividends paid
|
(565,432
|
)
|
(381,878
|
)
|
(301,973
|
)
|
||||
|
Net
cash provided from financing activities
|
11,622,754
|
34,512,010
|
18,624,737
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(6,461,499
|
)
|
(7,157,554
|
)
|
8,639,923
|
|||||
|
Cash
and cash equivalents at beginning
|
||||||||||
|
of
period
|
19,325,645
|
26,483,199
|
17,843,276
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
12,864,146
|
$
|
19,325,645
|
$
|
26,483,199
|
||||
|
Supplemental
disclosure:
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
|
$
|
7,941,548
|
$
|
3,139,817
|
$
|
2,431,318
|
||||
|
Taxes
|
$
|
445,000
|
$
|
907,268
|
$
|
1,000,000
|
||||
|
Non-cash
investing and financing activities:
|
||||||||||
|
Unrealized
loss
on securities available-for-sale
|
$
|
(4,312,281
|
)
|
$
|
(1,554,287
|
)
|
$
|
(825,072
|
)
|
|
|
Transfer
of
loans to foreclosed property
|
$
|
721,052
|
$
|
119,916
|
$
|
25,701
|
||||
|
Common
stock issued in acquisition
|
$
|
-
|
$
|
29,845,623
|
$
|
-
|
||||
|
See
Notes to Consolidated Financial
Statements
|
||||||||||
FIRST COMMUNITY CORPORATION
Note
1 -
ORGANIZATION AND BASIS OF PRESENTATION
The
consolidated financial statements include the accounts of First Community
Corporation (the company) and its wholly owned subsidiary First Community Bank,
N.A (the bank). All material intercompany transactions are eliminated in
consolidation. The Company was organized on November 2, 1994, as a South
Carolina corporation, and was formed to become a bank holding company. The
bank
opened for business on August 17, 1995.
Note
2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of
Estimates
The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. These principles require
management to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Material
estimates that are particularly susceptible to significant change relate to
the
determination of the reserve for loan losses. The estimation process includes
management’s judgment as to future losses on existing loans based on an internal
review of the loan portfolio, including an analysis of the borrower’s current
financial position, the consideration of current and anticipated economic
conditions and the effect on specific borrowers. In determining the
collectibility of loans management also considers the fair value of underlying
collateral. Various regulatory agencies, as an integral part of their
examination process, review the Company’s allowance for loan losses. Such
agencies may require the company to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination. Because of these factors it is possible that the allowance for
loan
losses could change materially.
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of cash on hand, due from banks, federal funds sold
and
securities purchased under agreements to resell. Generally federal funds are
sold for a one-day period and securities purchased under agreements to resell
mature in less than 90 days.
Investment
Securities
Investment
securities are classified as either held-to-maturity or available-for-sale.
In
determining such classification, securities that the company has the positive
intent and ability to hold to maturity are classified as held-to maturity and
are carried at amortized cost. All other securities are classified as
available-for-sale and carried at estimated fair values with unrealized gains
and losses included in shareholders’ equity on an after tax basis.
Gains
and
losses on the sale of available-for-sale securities are determined using the
specific identification method. Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their cost that are
judged to be other than temporary are written down to fair value and charged
to
income in the Consolidated Statement of Income.
Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
Loans
and Allowance for Loan Losses
Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans. Interest is
recognized over the term of the loan based on the loan balance outstanding.
Fees
charged for originating loans, if any, are deferred and offset by the deferral
of certain direct expenses associated with loans originated. The net deferred
fees are recognized as yield adjustments by applying the interest
method.
The
allowance for loan losses is maintained at a level believed to be adequate
by
management to absorb potential losses in the loan portfolio. Management’s
determination of the adequacy of the allowance is based on an evaluation of
the
portfolio, past loss experience, economic conditions and volume, growth and
composition of the portfolio.
The
company considers a loan to be impaired when, based upon current information
and
events, it is believed that the company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Loans that are
considered impaired are accounted for at fair value. The accrual of interest
on
impaired loans is discontinued when, in management’s opinion , the borrower may
be unable to meet payments as they become due, generally when a loan becomes
90
days past due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received first to principal and then to interest
income.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using the straight-line method over the asset’s estimated useful life.
Estimated lives range up to 39 years for buildings and up to 10 years for
furniture, fixtures and equipment.
Goodwill
and Other Intangible Assets
Goodwill
represents the cost in excess of fair value of net assets acquired (including
identifiable intangibles) in purchase transactions. Other intangible assets
represent premiums paid for acquisitions of core deposits (core deposit
intangibles). Core deposit intangibles are being amortized on a straight-line
basis over seven years. Goodwill and identifiable intangible assets are reviewed
for impairment annually or whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Recoverability of
identifiable intangible assets is measured by a comparison of the carrying
amount of the asset to future undiscounted cash flows expected to be generated
by the asset. If such assets are considered impaired , the amount of impairment
is measured by the amount by which the carrying value of the asset exceeds
the
fair value of the asset based on the discounted expected future cash flows.
The
test for goodwill impairment is based on an identified reporting unit and
the determination of the carrying value of the assets and liabilities, including
the existing goodwill and intangible assets. The carrying value is compared
to
the fair value to determine whether impairment exists. No impairment losses
have
been recorded as a result of the company’s analyses during the years ended
December 31, 2005, 2004 and 2003.
Comprehensive
Income
The
Company reports comprehensive income in accordance with SFAS 130, “Reporting
Comprehensive Income.” SFAS 130 requires that all items that are required to be
reported under accounting standards as comprehensive income be reported in
a
financial statement that is displayed with the same prominence as other
financial statements. The disclosures requirements have been included in the
Company’s consolidated statements of shareholders’ equity and comprehensive
income.
Mortgage
Origination Fees
Mortgage
origination fees relate to activities comprised of accepting residential
mortgage applications, qualifying borrowers to standards established by
investors and selling the mortgage loans to the investors under pre-existing
commitments. The loans are funded by the investor at closing and the related
fees received by the Company for these services are recognized at the time
the
loan is closed.
Marketing
and Public Relations Expense
The
company expenses marketing and public relations expense as incurred
Income
Taxes
A
deferred income tax liability or asset is recognized for the estimated future
effects attributable to differences in the tax bases of assets or liabilities
and their reported amounts in the financial statements as well as operating
loss
and tax credit carry forwards. The deferred tax asset or liability is measured
using the enacted tax rate expected to apply to taxable income in the period
in
which the deferred tax asset or liability is expected to be
realized.
Stock
Based Compensation Cost
The
Company applies Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees”. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the market price of the Company’s stock at
the date of the grant over the amount an employee must pay to acquire the stock.
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (SFAS 123) was issued in October 1995, and encourages but
does not require, adoption of a fair value method of accounting for employee
stock based compensation plans. The company has adopted the disclosure-only
provisions of SFAS 123 and has disclosed in the notes pro-forma net income
and
earnings per share information as if the fair value method had been
applied.
Effective
December 31, 2005, upon recommendation of the Human Resource Committee of the
Board of Directors of First Community Corporation, the Company's Board of
Directors accelerated the vesting of, and vested, all outstanding options to
acquire the Company's common stock granted in 2003, 2004 and 2005, totaling
approximately 67,000 options, that would otherwise vest at various times through
the end of fiscal 2011 (“Acceleration”). All other terms and conditions of such
options remain unchanged as a result of the Acceleration. See note 15 for
additional information relative to the Acceleration and Statement of Financial
Accounting Standard 123 (revised 2004).
Earnings
Per Share
Basic
earnings per share (“EPS”) excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net income
by
the weighted number of average shares of common stock and common stock
equivalents. Common stock equivalents consist of stock options and are computed
using the treasury stock method.
Segment
Information
Statement
of Financial Accounting Standards (SFAS) No. 131 “Disclosures about Segments of
an Enterprise and Related Information” requires selected segment information of
operating segments based on a management approach. The company operates as
one
business segment.
Recently
Issued Accounting Standards
The
following is a summary of recent authoritative pronouncements that affect
accounting, reporting, and disclosure of financial information by the
Company:
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 is effective for loans acquired in years beginning after
December 15, 2004, with early adoption encouraged. SOP
03-3
is not expected to have a material impact on the Company's results of operations
or financial. The impact of SOP No. 03-3 will be meaningful if in the future
the
Company enters into a business combination with a financial institution and/or
acquires in a transfer loan portfolio.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) will require
companies to measure all employee stock-based compensation awards using a fair
value method and record such expense in its financial statements. In addition,
the adoption of SFAS No. 123(R) requires additional accounting and disclosures
related to the income tax and cash flow effects resulting from share-based
payment arrangements. SFAS No. 123(R) is effective beginning as of the first
annual reporting period beginning after December 15, 2005. SFAS No. 123(R)
allows for adoption using either the modified prospective or modified
retrospective methods. The Company anticipates using the modified prospective
method when this statement is adopted in the first quarter of 2006. See Note
15.
In
April
2005, the Securities and Exchange Commission’s Office of the Chief Accountant
and its Division of Corporation Finance issued Staff Accounting Bulletin (“SAB”)
No.107 to provide guidance regarding the application of SFAS No.123(R). SAB
No.
107 provides interpretive guidance related to the interaction between SFAS
No.123(R) and certain SEC rules and regulations, as well as the staff’s views
regarding the valuation of share-based payment arrangements for public
companies. SAB No. 107 also reminds public companies of the importance of
including disclosures within filings made with the SEC relating to the
accounting for share-based payment transactions, particularly during the
transition to SFAS No.123(R).
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
an amendment of APB Opinion No. 29.” The standard is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value
of
the assets exchanged and eliminates the exception under ABP Opinion No. 29
for
an exchange of similar productive assets and replaces it with an exception
for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. The
standard is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS 153 is not expected to
have
a material impact on the Company's financial position or results of
operations.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154
establishes retrospective application as the required method for reporting
a
change in accounting principle, unless it is impracticable, in which case the
changes should be applied to the latest practicable date presented. SFAS No.
154
also requires that a correction of an error be reported as a prior period
adjustment by restating prior period financial statements. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
In
March
2004, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments.” This issue addresses the meaning of other-than-temporary
impairment and its application to investments classified as either available
for
sale or held to maturity under SFAS No. 115 and it also provides guidance on
quantitative and qualitative disclosures. The disclosure requirements in
paragraph 21 of this Issue were effective for annual financial statements for
fiscal years ending after December 15, 2003 and were adopted by the Company
effective December 31, 2003.
The
recognition and measurement guidance in paragraphs 6-20 of this Issue was to
be
applied to other-than-temporary impairment evaluations in reporting periods
beginning after June 15, 2004, but was delayed by FASB action in October 2004
through the issuance of a proposed FASB Staff Position (“FSP”) on the issue. In
July 2005, the FASB issued FSP FAS 115-1 and FAS 124-1 “The
Meaning
of
Other-Than-Temporary Impairment and its Application to Certain Investments.”
This final guidance eliminated paragraphs10-18 of EITF-03-1 (paragraphs 19-20
have no material impact on the financial position or results of operations
of
the Company) and will be effective for other-than-temporary impairment analysis
conducted in periods beginning after December 15, 2005. The Company has
evaluated the impact that the adoption of FSP FAS 115-1 and FAS 124-1 and has
concluded that the adoption will not have a material impact on financial
position and results of operations upon adoption.
In
December 2005, the FASB issued FSP SOP 94-6-1, “Terms of Loan Products that May
Give Rise to a Concentration of Credit Risk.” The disclosure guidance in this
FSP is effective for interim and annual periods ending after December 19, 2005.
The FSP states that the terms of certain loan products may increase a reporting
entity's exposure to credit risk and thereby may result in a concentration
of
credit risk as that term is used in SFAS
No.
107,
either
as an individual product type or as a group of products with similar features.
SFAS
No.
107
requires
disclosures about each significant concentration, including “information about
the (shared) activity, region, or economic characteristic that identifies the
concentration.” The FSP suggests possible shared characteristics on which
significant concentrations may be determined which include, but are not limited
to:
borrowers
subject to significant payment increases, loans with terms that permit negative
amortization and loans with high loan-to-value ratios.
This
FSP
requires entities to provide the disclosures required by SFAS No. 107 for loan
products that are determined to represent a concentration of credit risk in
accordance with the guidance of this FSP for all periods presented. The Company
adopted this disclosure standard effective December 31, 2005.
Note
3 -
BUSINESS COMBINATION
On
October 1, 2004, First Community acquired DutchFork Bancshares, the holding
company for Newberry Federal Savings Bank located I n
Newberry, South Carolina. The merger enabled First Community to increase
its market share in the Midlands of South Carolina. The total purchase price
was
$49,273,493, including $18,342,357 in cash, 1,169,898 shares of our common
stock
valued at $27,258,623, stock options valued at $2,587,000 and direct acquisition
cost of $1,085,513. The value of the common stock issued was determined
based on the average closing price over the six day period beginning two days
before and ending three days after the terms of the acquisition were agreed
to
and announced. The intangible assets acquired in conjunction with the
purchase are core deposit intangible and goodwill. The core deposit
intangible is being written off over a period of seven years using the
straight-line method. The transaction was a tax-free reorganization for
federal income tax purposes and intangible assets are not deductible for tax
purposes.
Note
4 -
INVESTMENT SECURITIES
The
amortized cost and estimated fair values of investment securities are summarized
below:
HELD-TO-MATURITY:
|
|
Amortized
Cost
|
Gross
Unrealized
Gain
|
Gross
Unrealized
Loss
|
Fair
Value
|
|||||||||
|
December
31, 2005:
|
|
|
|
|
|||||||||
|
State
and local government
|
$
|
5,653830
|
$
|
58,316
|
$
|
25,698
|
$
|
5,686,448
|
|||||
|
OO
Other
|
60,000
|
—
|
—
|
60,000
|
|||||||||
|
|
$
|
5,713,830
|
$
|
58,316
|
$
|
25,698
|
5,746,448
|
||||||
|
December
31, 2004:
|
|
|
|
|
|||||||||
|
State
and local government
|
$
|
6,005,745
|
$
|
144,919
|
$
|
12,966
|
6,137,698
|
||||||
|
Other
|
10,000
|
—
|
—
|
10,000
|
|||||||||
|
|
$
|
6,015,745
|
$
|
144,919
|
$
|
12,966
|
$
|
6,147,698
|
|||||
AVAILABLE-FOR-SALE:
|
|
Amortized
Cost
|
Gross
Unrealized
Gain
|
Gross
Unrealized
Loss
|
Fair
Value
|
|||||||||
|
|
|
|
|
|
|||||||||
|
December
31, 2005:
|
|||||||||||||
|
US
Treasury securities
|
$
|
999,848
|
$
|
—
|
$
|
7,973
|
$
|
991,875
|
|||||
|
US
Government agency securities
|
58,674,004
|
671
|
1,195,657
|
57,479,018
|
|||||||||
|
Mortgage-backed
securities
|
70,967,405
|
61,117
|
1,234,803
|
69,793,719
|
|||||||||
|
State
and local government
|
249,359
|
3,881
|
---
|
253,240
|
|||||||||
|
Equity
and other securities
|
45,419,667
|
19,519
|
3,299,268
|
42,139,918
|
|||||||||
|
|
$
|
176,310,283
|
$
|
85,188
|
$
|
5,737,701
|
$
|
170,657,770
|
|||||
|
|
|||||||||||||
|
December
31, 2004:
|
|||||||||||||
|
US
Treasury securities
|
$
|
999,546
|
$
|
-
|
$
|
1,734
|
$
|
997,812
|
|||||
|
US
Government agency securities
|
64,106,098
|
47,693
|
398,390
|
63,755,401
|
|||||||||
|
Mortgage-backed
securities
|
71,096,802
|
155,312
|
196,538
|
71,055,576
|
|||||||||
|
Equity
and other securities
|
55,148,097
|
189,631
|
1,136,210
|
54,201,518
|
|||||||||
|
|
$
|
191,350,543
|
$
|
392,636
|
$
|
1,732,872
|
$
|
190,010,307
|
|||||
At
December 31, 2005, equity and other investments in securities available for
sale
included the following recorded at fair value: Federal Home Loan Mortgage
Corporation preferred stock of $16,125,200, Federal National Mortgage
Association preferred stock of $12,088,560, corporate bonds of $8,607,057,
Federal Home Loan Bank Stock of $2,351,200, Federal Reserve Bank Stock of
$1,624,500, mutual funds of $1,233,452 and community bank stocks of $110,000.
At
December 31, 2004, equity and other investment securities available for sale
included the following recorded at fair value: Federal Home Loan Mortgage
Corporation preferred stock of $23,159,175, Federal National Mortgage
Association preferred stock of $18,969,620, corporate bonds of $7,754,246,
Federal Home Loan Bank Stock of $2,631,000, Federal Reserve Bank Stock of
$308,200, mutual funds of $1,269,276 and community bank stocks of $110,000
For
the
year ended December 31, 2005, proceeds from the sale of securities
available-for-sale amounted to $39,071,729. Gross realized gain amounted to
$294,661 and gross realized losses amounted to $106,243 in 2005. For the
year ended December 31, 2004, proceeds from the sales of securities
available-for-sale amounted to $56,586,668. Gross realized gains amounted to
$16,119 and gross realized losses amounted to $4,738 in 2004. The tax provision
applicable to the realized net gains was approximately $65,000 and $3,400 for
2005 and 2004, respectively. There were no sales of securities in
2003.
The
amortized cost and fair value of investment securities at December 31, 2005,
by
contractual maturity, follow. Expected maturities differ from contractual
maturities because borrowers may have the right to call or prepay the
obligations with or without prepayment penalties.
|
|
Held-to-maturity
|
Available-for-sale
|
|||||||||||
|
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Due
in one year or less
|
$
|
330,363
|
$
|
331,432
|
$
|
26,972,096
|
$
|
26,741,927
|
|||||
|
Due
after one year through five years
|
3,152,139
|
3,171,475
|
80,214,252
|
$
|
78,403,274
|
||||||||
|
Due
after five years through ten years
|
2,231,328
|
2,243541
|
21,315,164
|
$
|
20,865,846
|
||||||||
|
Due
after ten years
|
---
|
---
|
47,808,771
|
$
|
44,646,723
|
||||||||
|
|
$
|
5,713,830
|
$
|
5,746,448
|
$
|
176,310,283
|
$
|
170,657,770
|
|||||
Securities
with an amortized cost of $49,941,250 and fair value of $48,957,410 at December
31, 2005, were pledged to secure FHLB Advances, public deposits, demand notes
due the U.S. Treasury and securities sold under agreements to
repurchase.
The
following table shows gross unrealized losses and fair values, aggregated by
investment category and length of time that individual securities have been
in a
continuous loss position at December 31, 2005.
|
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||
|
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
|||||||||||||
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|||||||||||||
| US Treasury and US | |||||||||||||||||||
|
Government
agency securities
|
$
|
4,531,185
|
$
|
73,959
|
$
|
50,689,215
|
$
|
1,129,671
|
$
|
55,220,400
|
$
|
1,203,630
|
|||||||
|
Federal
agency mortgage-backed securities
|
12,631,631
|
272,280
|
20,596,312
|
562,265
|
33,227,943
|
834,545
|
|||||||||||||
|
Non-agency
mortgage-backed securities
|
11,748,240
|
160,835
|
10,332,955
|
239,423
|
22,081,195
|
400,258
|
|||||||||||||
|
FNMA
and FHLMC preferred stock
|
---
|
---
|
28,213,718
|
3,140,111
|
28,213,718
|
3,140,111
|
|||||||||||||
|
Corporate
bonds
|
499,500
|
19
|
1,872,218
|
123,314
|
2,371,718
|
123,333
|
|||||||||||||
|
Other
|
1,233,452
|
35,824
|
---
|
---
|
1,233,452
|
35,824
|
|||||||||||||
|
|
30,644,008
|
542,917
|
111,704,418
|
5,194,784
|
142,348,426
|
5,737,701
|
|||||||||||||
|
Held-to-maturity
securities:
|
|
|
|
|
|
|
|||||||||||||
|
State
and local government
|
495,600
|
4,400
|
1,382,203
|
21,298
|
1,877,803
|
25,698
|
|||||||||||||
|
Total
|
$
|
31,139,608
|
$
|
547,317
|
$
|
113,086,621
|
$
|
5,216,082
|
$
|
144,226,229
|
$
|
5,763,399
|
|||||||
U.S.
Treasury and U. S.Government agency securities: The
unrealized losses on the Company’s investments in U.S. Treasury obligations and
direct obligations of U.S. government agencies were caused by interest rate
increases. The contractual terms of those investments do not permit the issuer
to settle the securities at a price less than the amortized cost of the
investment. Because the Company has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, the Company
does not consider those investments to be other-than-temporarily impaired at
December 31, 2005
Federal
Agency Mortgage-Backed Securities: The
unrealized losses on the Company’s investment in federal agency mortgage-backed
securities were caused by interest rate increases. The contractual cash flows
of
those investments are guaranteed by an agency of the U.S. government.
Accordingly, it is expected that the securities would not be settled at a price
less than the amortized cost of the Company’s investment. Because the decline in
market value is attributable to changes in interest rates and not
credit
quality, and because the Company has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, the Company
does not consider those investments to be other-than-temporarily impaired at
December 31,2005.
Non-agency
Mortgage-Backed Securities: The
unrealized losses on the Company’s investment in non-agency mortgage-backed
securities were caused by interest rate increases. The contractual cash flows
of
these investments are current and none of the obligations are deemed to be
invested in high risk tranches. Accordingly, it is expected that the securities
would not be settled at a price less than the amortized cost of the Company’s
investment. Because the decline in market value is attributable to changes
in
interest rates and not credit quality, and because the Company has the ability
and intent to hold those investments until a recovery of fair value, which
may
be maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31,2005.
FNMA
and
FHLMC Preferred Stock: All of the agency preferred stock securities held by
the
Company are adjustable rate securities. The securities reprice over periods
ranging from three months to five years. The current cost basis of substantially
all of these securities is at a discount to the stated par value. Over the
last
twelve to eighteen months the issuers of these agency preferred securities,
FNMA
and FHLMC have come under considerable regulatory scrutiny regarding
misrepresentations relative to accounting practices. The rating agencies have
expressed concern over the rating of the securities but there have been no
significant downgrades in the ratings of the issuers and these securities are
rated Aa3 (Moody’s). Given the adjustable rate nature of the securities each of
the dividend rates will adjust to a level more in line with current or future
interest rates at a preset time in the future. Based on the evaluation by the
Company and the ability and intent to hold these securities for a reasonable
period of time sufficient for a recovery of fair value, the Company does not
consider these securities to be other-than-temporarily impaired at December
31,
2005.
Corporate
Bonds: The Company’s unrealized loss on investments in corporate bonds relates
to bonds with three different issuers. The unrealized losses were caused by
increases in interest rates. Each of these bonds is rated A+ or better (S&P)
and there have been no downgrades during the last twelve months. The Company
has
the ability and intent to hold these investments until a recovery of fair value,
which may be maturity. The Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2005.
State
and
Local Governments and Other: The unrealized losses on these investments are
attributable to increases in interest rates, rather than credit quality. The
Company has the ability and intent to hold these investments until a recovery
of
fair value and does not consider them to be other-than-temporarily impaired
at
December 31, 2005.
Note
5 -
LOANS
Loans
summarized by category are as follows:
|
|
December
31,
|
||||||
|
|
2005
|
2004
|
|||||
|
Commercial,
financial and agricultural
|
$
|
22,090,454
|
$
|
19,001,033
|
|||
|
Real
estate - construction
|
19,955,124
|
8,065,516
|
|||||
|
Real
estate - mortgage
|
|
|
|||||
|
Commercial
|
112,914,726
|
96,811,130
|
|||||
|
Residential
|
37,251,173
|
35,438,373
|
|||||
|
Consumer
|
29,456,155
|
27,455,292
|
|||||
|
|
$
|
221,667,632
|
$
|
186,771,344
|
|||
Activity
in the allowance for loan losses was as follows:
|
|
December
31,
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Balance
at the beginning of year
|
$
|
2,763,988
|
$
|
1,705,082
|
$
|
1,525,308
|
||||
|
Allowance
purchased in acquisition
|
— |
994,878
|
—
|
|||||||
|
Provision
for loan losses
|
328,679
|
245,000
|
167,000
|
|||||||
|
Charged
off loans
|
(521,278
|
)
|
(293,479
|
)
|
(235,183
|
)
|
||||
|
Recoveries
|
129,258
|
112,507
|
247,957
|
|||||||
|
Balance
at end of year
|
$
|
2,700,647
|
$
|
2,763,988
|
$
|
1,705,082
|
||||
At
December 31, 2005, the Bank had $101,000 loans in a non accrual status.
Loans classified impaired at December 31, 2005 and 2004 totaled $101,000 and
$0.00. These loans were recorded at or below fair value. The average
recorded investment in loans classified as impaired for the years ended December
31, 2005 and 2004 amounted to $315,860 and $149,084, respectively.
Loans
outstanding to Bank directors, executive officers and their related business
interests amounted to $4,182,129 and $2,318,853 at December 31, 2005 and 2004,
respectively. Repayments on these loans during the year ended December 31,
2005 were $332,642 and loans made amounted to $2,195,918. Related party
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and generally do not involve more than the normal risk of
collectibility.
Note
6 -
PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
December
31,
|
||||||
|
|
2005
|
2004
|
|||||
|
|
|
|
|||||
|
Land
|
$
|
5,146,966
|
$
|
4,906,222
|
|||
|
Premises
|
7,862,983
|
7,174,008
|
|||||
|
Equipment
|
4,734,620
|
4,245,711
|
|||||
|
Construction
in progress
|
2,227,941
|
1,050,855
|
|||||
|
|
19,972,510
|
17,376,796
|
|||||
|
Accumulated
depreciation
|
3,990,481
|
3,063,706
|
|||||
|
|
$
|
15,982,029
|
$
|
14,313,090
|
|||
Provision
for depreciation included in operating expenses for the years ended December
31,
2005, 2004 and 2003 amounted to $926,776, $761,277 and $631,356,
respectively.
The
company has entered into a contract to construct an approximate 28,000 square
foot administrative center adjacent to it current
main office. The total contract is approximately $3,400,000. In addition, the
company is building a new branch office
to
replace an existing modular office site the total contract cost of the branch
building is approximately $600,000. The company has
disbursed approximately $1,400,000 and $550,000 on the administrative center
and
branch office at December 31, 2005, respectively.
Note
7 -
INTANGIBLE AND OTHER ASSETS
Intangible
assets (excluding goodwill) consisted of the following:
|
|
December
31,
|
||||||
|
|
2005
|
2004
|
|||||
|
Core
deposit premiums, gross carrying amount
|
$
|
4,148,273
|
$
|
4,148,273
|
|||
|
Accumulated
amortization
|
(1,381,199
|
)
|
(786,458
|
)
|
|||
|
Net
|
$
|
2,767,074
|
$
|
3,361,815
|
|||
Amortization
of the core deposit intangibles amounted to $594,741, $279,685 and $178,710
for
the years ended December 31, 2005, 2004 and 2003, respectively. Amortization
is
estimated to be approximately $595,000 for each of the next five
years.
With
the
acquisition of DutchFork Bancshares the company acquired certain bank-owned
life
insurance policies that provide benefits to various employees and
officers. The carrying value of these policies at December 31, 2005 and
2004 was $5,811,302 and $5,560,208, respectively and are included in other
assets.
Note
8 -
DEPOSITS
At
December 31, 2005, the scheduled maturities of Certificates of Deposits are
as
follows:
|
2006
|
$
|
107,141,189
|
||
|
2007
|
19,082,029
|
|||
|
2008
|
4,632,144
|
|||
|
2009
|
14,412,677
|
|||
|
2010
|
10,852,883
|
|||
|
|
$
|
156,120,922
|
Note
9 -
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED MONEY
Securities
sold under agreements to repurchase generally mature within one to four days
from the transaction date. The weighted average interest rate at December
31, 2005 and 2004, was 3.38% and 0.71%, respectively. The maximum month-end
balance during 2005 and 2004 was $14,858,500 and $7,564,700 respectively.
Securities sold under agreements to repurchase are collateralized by securities
with a fair market value of 100% of the agreement.
Other
borrowed money at December 31, 2005 and 2004 consisted of $169,233 and $184,593,
respectively which was due under the treasury tax and loan note program.
Note
10 -
ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT
Advances
from the Federal Home Loan Bank of Atlanta at December 31, 2005 consisted of
the
following:
|
|
2005
|
2004
|
|||||||||||
|
Maturing
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
|||||||||
|
2005
|
|
$
|
—
|
2.08
|
%
|
$
|
2,500,000
|
||||||
|
2006
|
2.83
|
%
|
1,500,000
|
2.83
|
%
|
1,500,000
|
|||||||
|
2008
|
3.42
|
%
|
5,251,345
|
3.42
|
%
|
10,709,697
|
|||||||
|
2010
|
3.64
|
%
|
27,305,787
|
3.64
|
%
|
27,742,425
|
|||||||
|
More
than five years
|
1.00
|
%
|
467,277
|
—
|
|||||||||
|
3.54
|
%
|
$
|
34,524,409
|
3.46
|
%
|
$
|
42,452,122
|
||||||
As
collateral for its advances, the Company has pledged in the form of blanket
liens, eligible single family loans, home equity lines of credit, second
mortgage loans commercial real estate loans and multi family loans in the amount
of $70,397,860 at December 31,
2005.
In addition, securities with a fair value of $8,050,723 have been pledged
as collateral for advances as of December 31, 2005. At December 31, 2004
loans in the amount of $69,531,000 and securities with a fair value of
$18,393,735 were pledged as collateral for advances. In addition, the
company’s investment in Federal Home Loan Bank stock is pledged for
advances. Advances are subject to prepayment penalties. The average
advances during 2005 and 2004 were $41,290,862 and $14,314,420,
respectively. The average interest rate for 2005 and 2004 was 3.49% and
3.23%, respectively. The maximum outstanding amount at any month end was
$46,613,103 and $42,556,961 for 2005 and 2004.
Purchase
premiums included in advances acquired in the acquisition of DutchFork reflected
in the advances maturing in 2008 and 2010 amount to $251,345 and $2,305,787
at
December 31, 2005 and $709,697 and $2,742,425, at December 31, 2004. The
coupon rate on these advances are 5.67% and 5.76%, respectively.
On
September 16, 2004, FCC Capital Trust I (Trust I), a wholly owned subsidiary
of
the Company, issued and sold floating rate securities having an aggregate
liquidation amount of $15,000,000. The Trust I securities accrue and pay
distributions quarterly at a rate per annum equal to LIBOR plus 257 basis
points. The distributions are cumulative and payable in arrears. The
company has the right, subject to events of default, to defer payments of
interest on the Trust I securities for a period not to exceed 20 consecutive
quarters, provided no extension can extend beyond the maturity date of September
16, 2034. The Trust I securities are mandatorily redeemable upon maturity
of September 16, 2034. If the Trust I securities are redeemed on or after
September 16, 2009, the redemption price will be 100% of the principal amount
plus accrued and unpaid interest. The Trust I securities may be redeemed in
whole but not in part, at any time prior to September 16, 2009 following the
occurrence of a tax event, a capital treatment event or an investment company
event. Currently these securities qualify under risk-based capital
guidelines as Tier 1 capital, subject to certain limitations. The company
has no current intention to exercise its right to defer payments of interest
on
the Trust I securities.
Note
11 -
INCOME TAXES
Income
tax expense for the years ended December 31, 2005, 2004 and 2003 consists of
the
following:
|
|
Year
ended December 31
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Current
|
|
|
|
|||||||
|
Federal
|
$
|
137,642
|
$
|
651,304
|
$
|
869,508
|
||||
|
State
|
83,545
|
104,072
|
97,727
|
|||||||
|
|
221,187
|
755,376
|
967,235
|
|||||||
|
Deferred
|
|
|
|
|||||||
|
Federal
|
737,272
|
197,474
|
6,749
|
|||||||
|
State
|
74,145
|
10,000
|
(9,094
|
)
|
||||||
|
|
811,413
|
207,474
|
(2,345
|
)
|
||||||
|
Change
in valuation allowance
|
—
|
—
|
—
|
|||||||
|
Income
tax expense
|
$
|
1,032,600
|
$
|
962,850
|
$
|
964,890
|
||||
Reconciliation
from expected federal tax expense to effective income tax expense for the
periods indicated are as follows:
|
|
Year
ended December 31
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Expected
federal income tax expense
|
$
|
1,402,592
|
$
|
1,101,742
|
$
|
939,206
|
||||
|
|
|
|
|
|||||||
|
State
income tax net of federal benefit
|
104,075
|
37,584
|
64,600
|
|||||||
|
Tax
exempt interest
|
(73,999
|
)
|
(64,126
|
)
|
(61,300
|
)
|
||||
|
Nontaxable
dividends
|
(321,912
|
)
|
(101,821
|
)
|
|
|||||
|
Increase
in cash surrender value life insurance
|
(87,883
|
)
|
(18500
|
)
|
—
|
|||||
|
Other
|
9,727
|
7,971
|
22,384
|
|||||||
|
|
$
|
1,032,600
|
$
|
962,850
|
$
|
964,890
|
||||
The
following is a summary of the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax
liabilities:
|
|
December
31,
|
||||||
|
|
2005
|
2004
|
|||||
|
Assets:
|
|
|
|||||
|
Provision
for bad debts
|
$
|
971,980
|
$
|
994,777
|
|||
|
Excess
tax basis of deductible intangible assets
|
165,998
|
131,376
|
|||||
|
Premium
on purchased FHLB Advances
|
920,329
|
1,242,441
|
|||||
|
Net
operating loss carry forward
|
4,353,842
|
5,161,156
|
|||||
|
Excess
tax basis of assets acquired
|
488,534
|
488,534
|
|||||
|
Unrealized
loss on available-for sale-securities
|
2,046,309
|
482,359
|
|||||
|
Compensation
expense deferred for tax purposes
|
144,915
|
453,385
|
|||||
|
Other
|
676,360
|
859,779
|
|||||
|
Deferred
tax asset
|
9,768,267
|
9,813,807
|
|||||
|
Liabilities:
|
|
|
|||||
|
Tax
depreciation in excess of book depreciation
|
149,713
|
266,919
|
|||||
|
Excess
tax basis of non-deductible intangible assets
|
862,174
|
1,012,121
|
|||||
|
Excess
financial reporting basis of assets acquired
|
948,074
|
1,022,207
|
|||||
|
Income
tax bad debt reserve recapture adjustment
|
1,196,952
|
1,653,746
|
|||||
|
Other
|
66,946
|
66,943
|
|||||
|
Total
deferred tax liabilities
|
3,223,859
|
4,021,936
|
|||||
|
Net
deferred tax asset recognized
|
$
|
6,544,408
|
$
|
5,791,871
|
|||
At
December 31, 2005, the company has net operating loss carry forwards for state
and federal income tax purposes of $12,097,000 available to offset future
taxable income through 2023. There was no valuation allowance for deferred
tax
assets at either December 31, 2005 or 2004. No valuation allowance has
been established as it is management’s belief that realization of the deferred
tax asset is more likely than not. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during
the
periods in which the temporary differences become deductible. Management
considers the scheduled reversal of deferred income tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. The amount of these deferred tax assets considered to be
realizable could be reduced in the near term if estimates of future taxable
income during the carry forward period are reduced. The net deferred asset
is included in other assets on the consolidated balance sheets.
A
portion
of the change in the net deferred tax asset relates to unrealized gains and
losses on securities available-for-sale. The change in the tax benefit
related to unrealized losses on available for sale securities of $1,563,950
has
been recorded directly to shareholders’ equity. The balance of the change
in the net deferred tax asset results from current period deferred tax expense
of $811,413.
Note
12 -
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement
of Financial Accounting Standards No. 107, “Disclosure about Fair Value of
Financial Instruments” (SFAS 107), requires the Company to disclose estimated
fair values for its financial instruments. Fair value estimates, methods,
and assumptions are set forth below.
Cash
and
short term investments - The carrying amount of these financial instruments
(cash and due from banks, federal funds sold and securities purchased under
agreements to resell) approximates fair value. All mature within 90 days
and do not present unanticipated credit concerns.
Investment
Securities - Fair values are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans
-
The fair value of loans are estimated by discounting the future cash flows
using
the current rates at which similar loans ‘would be made to borrowers with
similar credit ratings and for the same remaining maturities. As discount
rates are based on current loan rates as well as management estimates, the
fair
values presented may not be indicative of the value negotiated in an actual
sale.
Accrued
Interest Receivable - The fair value approximates the carrying
value.
Deposits
- The fair value of demand deposits, savings accounts, and money market accounts
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposits is estimated by discounting the future
cash flows using rates currently offered for deposits of similar remaining
maturities.
Federal
Home Loan Bank Advances - Fair value is estimated based on discounted cash
flows
using current market rates for borrowings with similar terms.
Short
Term Borrowings - The carrying value of short term borrowings (securities sold
under agreements to repurchase and demand notes to the U.S. Treasury)
approximates fair value.
Long-term
Debt - The fair values of long-term debt is estimated by using discounted cash
flow analyses based on incremental borrowing rates for similar types of
instruments.
Accrued
Interest Payable - The fair value approximates the carrying value.
Commitments
to Extend Credit - The fair value of these commitments is immaterial because
their underlying interest rates approximate market.
The
carrying amount and estimated fair value of the Company’s financial instruments
are as follows:
|
|
December
31, 2005
|
December
31, 2004
|
|||||||||||
|
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||
|
Financial
Assets:
|
|
|
|
|
|||||||||
|
Cash
and short term investments
|
$
|
12,864,146
|
$
|
12,864,146
|
$
|
19,325,645
|
$
|
19,325,645
|
|||||
|
Held-to-maturity
securities
|
5,713,830
|
5,746,448
|
6,015,745
|
6,147,698
|
|||||||||
|
Available-for-sale
securities
|
170,657,770
|
170,657,770
|
190,010,307
|
190,010,307
|
|||||||||
|
Loans
receivable
|
221,667,632
|
218,651,290
|
186,771,344
|
183,609,011
|
|||||||||
|
Allowance
for loan losses
|
2,700,647
|
—
|
2,763,988
|
—
|
|||||||||
|
Net
loans
|
218,966,985
|
218,651,290
|
184,007,356
|
183,609,011
|
|||||||||
|
Accrued
interest
|
2,001,957
|
2,001,957
|
1,660,972
|
1,660,972
|
|||||||||
|
Interest
rate cap
|
192,898
|
192,898
|
—
|
—
|
|||||||||
|
Financial
liabilities:
|
|
|
|
|
|||||||||
|
Non-interest
bearing demand
|
$
|
57,326,637
|
$
|
57,326,637
|
$
|
49,519,816
|
$
|
49,519,816
|
|||||
|
NOW
and money market accounts
|
106,337,887
|
106,337,887
|
98,846,828
|
98,846,828
|
|||||||||
|
Savings
|
29,818,705
|
29,818,705
|
35,370,267
|
35,370,267
|
|||||||||
|
Certificates
of deposit
|
156,120,922
|
156,541,947
|
153,327,373
|
154,390,247
|
|||||||||
|
Total
deposits
|
349,604,151
|
350,025,176
|
337,064,284
|
338,127,158
|
|||||||||
|
Federal
Home Loan Bank Advances
|
34,524,409
|
32,590,242
|
42,152,122
|
41,422,224
|
|||||||||
|
Short
term borrowings
|
13,975,633
|
13,975,633
|
7,734,493
|
7,734,493
|
|||||||||
|
Long-term
debt
|
15,464,000
|
15,464,000
|
15,464,000
|
15,464,000
|
|||||||||
|
Accrued
interest payable
|
2,053,833
|
2,053,833
|
1,015,435
|
1,015,435
|
|||||||||
Note
13 -
COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES
The
Bank
is party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess
of
the amount recognized in the consolidated balance sheets.
The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented
by
the contractual amount of these instruments. The Bank uses the same credit
policies in making commitments as for on-balance sheet instruments. At
December 31, 2005 and 2004, the Bank had commitments to extend credit including
unused lines of credit of $38,700,000 and $32,499,000,
respectively.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require a payment of a fee. Since commitments may expire without being
drawn upon, the total commitments do not necessarily represent future cash
requirements. The Bank evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if
deemed
necessary
by the Bank upon extension of credit, is based on management’s credit evaluation
of the party. Collateral held varies but may include inventory, property
and equipment, residential real estate and income producing commercial
properties.
The
primary market area served by the Bank is Lexington, Richland and Newberry
Counties within the Midlands of South Carolina. Management closely
monitors its credit concentrations and attempts to diversify the portfolio
within its primary market area. The Company considers concentrations of credit
risk to exist when pursuant to regulatory guidelines, the amounts loaned to
multiple borrowers engaged in similar business activities represent 25% or
more
of the bank’s risk based capital, or
approximately
$9.7 million. Based on this criteria, the Bank had three such concentrations
at
December 31, 2005, including $29.6 (13.4% of total loans) million to lessors
of
residential properties, $29.2 million (13.1% of total loans) of lessors of
non-residential properties and $10.4 million (4.7% of total loans) to religious
organizations. Although, the Bank’s loan portfolio as well as existing
commitments reflect the diversity of its primary market area, a substantial
portion of its debtor’s ability to honor their contracts is dependent upon the
economic stability of the area.
The
nature of the business of the company and bank may at times result in a certain
amount of litigation. The bank is involved in certain litigation that is
considered incidental to the normal conduct of business. Management
believes that the liabilities, if any, resulting from the proceedings will
not
have a material adverse effect on the consolidated financial position,
consolidated results of operations or consolidated cash flows of the
company.
At
December 31, 2005, the Bank had entered into an interest rate cap agreement
with
a notional amount of $10.0 million with an interest rate cap on three month
LIBOR of 4.50% expiring on September 1, 2009. 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 the Bank of the difference
between the cap rate of interest and the market rate of interest. The Bank’s
exposure to credit risk is limited to the ability of the counterparty to make
potential future payments required pursuant to the agreement. The Bank’s
exposure to market risk of loss is limited to the market value of the cap.
At
December 31, 2005, the market value was $192,898. Any gain or loss on the value
of this contract is recognized in earnings on a current basis. The Bank has
not
received any payments under the terms of the contract. During the year ended
December 31, 2005, the bank recognized $37,898 in other income to reflect the
increase in the value of the contract.
DutchFork
had entered into several interest rate cap agreements prior to the date of
acquisition. These included two agreements with notional amounts of $40.0
million and $20.0 million with one month LIBOR cap rates of 3.5% and 3.0%,
respectively. These agreements expired on November 15, 2004. In addition, they
had two agreements with notional amounts of $25.0 million each with a one month
LIBOR cap rate of 7.0%. These agreements expired on March 18, 2005. Due to
the
cap rate and the short period to expiration, these interest rate caps had no
market value at the date of acquisition. The Company received no payments on
these agreements and recorded no change in value during any period as they
never
regained their value from the date of acquisition until expiration.
Note
14 -
OTHER EXPENSES
A
summary
of the components of other non-interest expense is as follows:
|
|
December
31,
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Data
processing
|
$
|
199,347
|
$
|
127,031
|
$
|
87,161
|
||||
|
Supplies
|
262,251
|
190,972
|
126,063
|
|||||||
|
Telephone
|
291,911
|
205,908
|
146,940
|
|||||||
|
Correspondent
services
|
167,442
|
140,182
|
75,931
|
|||||||
|
Insurance
|
246,132
|
149,482
|
113,064
|
|||||||
|
Postage
|
164,260
|
110,798
|
84,512
|
|||||||
|
Professional
fees
|
414,726
|
189,525
|
194,380
|
|||||||
|
Other
|
815,022
|
513,572
|
372,587
|
|||||||
|
|
$
|
2,561,091
|
$
|
1,627,470
|
$
|
1,200,638
|
||||
Note
15 -
STOCK OPTIONS
The
Company has adopted a Stock Option Plan whereby shares have been reserved for
issuance by the Company upon the grant of stock options or restricted stock
awards. At December 31, 2005 the Company has 104,750 shares reserved for
future grants. The plan provides for the grant of options to key employees
and
Directors as determined by a Stock Option Committee made up of at least two
members of the Board of Directors. Options are exercisable for a period of
ten
years from date of grant.
Stock
option transactions for the years ended December 31, 2005, 2004 and 2003 are
summarized as follows.
|
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||
|
Outstanding
January 1, 2003
|
158,501
|
$
|
9.66
|
||||
|
Exercised
|
6,923
|
8.54
|
|||||
|
Granted
|
3,500
|
18.84
|
|||||
|
Forfeited
|
4,315
|
11.78
|
|||||
|
Outstanding
December 31, 2003
|
150,763
|
9.91
|
|||||
|
Exercised
|
15,409
|
9.01
|
|||||
|
Granted
|
3,000
|
22.17
|
|||||
|
Granted
in acquisition
|
180,685
|
9.23
|
|||||
|
Forfeited
|
1,602
|
13.67
|
|||||
|
Outstanding
December 31, 2004
|
317,437
|
9.66
|
|||||
|
Exercised
|
52,845
|
8.57
|
|||||
|
Granted
|
63,500
|
20.20
|
|||||
|
Forfeited
|
—
|
—
|
|||||
|
Outstanding
December 31, 2005
|
328,092
|
$
|
11.87
|
||||
|
Exercisable
at December 31, 2005
|
328,092
|
$
|
11.87
|
||||
In
October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement
of Financial Accounting Standards No. 123, “Accounting for Stock Based
Compensation” (SFAS 123) The statement defines a fair value based method of
accounting for employee stock options granted after December 31, 1994.
However, SFAS 123 allows an entity to account for these plans according to
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), provided pro forma disclosure of net income and earnings
per share are made as if SFAS 123 had been applied. The Company has
elected to use APB 25 and provide the required pro-forma disclosures.
Accordingly, no compensation cost has been recognized in the financial
statements for the Company’s stock option plan.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) will require
companies to measure all employee stock-based compensation awards using a fair
value method and record such expense in its financial statements. In addition,
the adoption of SFAS No. 123(R) requires additional accounting and disclosures
related to the income tax and cash flow effects resulting from share-based
payment arrangements. SFAS No. 123(R) is effective beginning as of the first
annual reporting period beginning after December 15, 2005. The board of
directors upon recommendation of the Human Resources Committee approved
accelerating the vesting of 67,000 unvested stock options. The accelerated
vesting is effective as of December 31, 2005. All of the other terms and
conditions applicable to the outstanding stock options remained unchanged.
The
decision to accelerate vesting of these options will avoid recognition of
pre-tax compensation expense by the Company upon the adoption of SFAS 123R.
In
the Company’s view, the future compensation expense could outweigh the incentive
and retention value associated with the stock options. The future pre-tax
compensation expense that will be avoided using estimated Black-Scholes value
calculations, and based upon the effective date of January 1, 2006, is expected
to be approximately $123,000, $76,000 and $45,000 in fiscal years 2006, 2007
and
2008, respectively. The acceleration meets the criteria for variable accounting
under FIN No. 44. Under the provisions of FIN No. 44 the acceleration did not
result in any pre-tax charge to earnings in the year ended December 31,
2005.
The
following summarizes pro-forma data in accordance with SFAS 123 including the
effects of the acceleration for the year ended December 31, 2005:
|
|
Year
ended December 31,
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
|
|
|
|
|||||||
|
Net
income, pro-forma
|
$
|
2,792,578
|
$
|
2,179,236
|
$
|
1,772,921
|
||||
|
Basic
earnings/loss per common share, pro-forma
|
$
|
0.99
|
$
|
1.15
|
$
|
1.11
|
||||
|
Diluted
earnings loss per common share, pro-forma
|
$
|
0.94
|
$
|
1.09
|
$
|
1.07
|
||||
The
fair
value of each grant is estimated on the date of grant using the Black-Sholes
option pricing model. The weighted average fair value of options granted,
excluding those issued in the Dutch Fork acquisition, during 2005, 2004 and
2003
was $6.87, $7.15 and $5.62. Those granted in conjunction with the
acquisition in 2004 had an average fair value of $14.32.
In
calculating the pro-forma disclosures, the fair value of options granted is
estimated as of the date of grant using the Black-Sholes option pricing model
with the following weighted-average assumptions:
|
|
2005
|
2004
|
2003
|
|||||||
|
Dividend
yield
|
1.0
|
%
|
1.0
|
%
|
0.9
|
%
|
||||
|
Expected
volatility
|
24.3
|
%
|
24.8
|
%
|
25.4
|
%
|
||||
|
Risk-free
interest rate
|
4.3
|
%
|
4.3
|
%
|
3.0
|
%
|
||||
|
Expected
life
|
8
Years
|
7
Years
|
7
Years
|
|||||||
Note
16 -
EMPLOYEE BENEFIT PLAN
The
Company maintains a 401 (k) plan which covers substantially all employees.
Participants may contribute up to the maximum allowed by the regulations.
During the year ended December 31, 2005, 2004 and 2003 the plan expense amounted
to $102,130, $137,177 and $106,398 respectively. The Company matches 50% of
an
employee’s contribution up to a 6.00% participant contribution.
The
Company acquired various single premium life insurance policies from DutchFork
that are funding fringe benefits to certain employees and officers. The cash
surrender value at December 31, 2005 was $5,811,302. A Salary Continuation
Plan
was established payable to two key individuals upon attainment of age 63. The
plan provides for monthly benefits of $2,500 each for seventeen years. Expenses
accrued for the anticipated benefits for the year ended December 31, 2005
amounted to $95,427. Other plans acquired were supplemental life insurance
covering certain key employees. No expense is accrued relative to these
benefits, as the life insurance covers the anticipated payout with the Company
receiving the remainder, thereby recovering its investment in the
policies.
Note
17 -
EARNINGS PER SHARE
The
following reconciles the numerator and denominator of the basic and diluted
earnings per share computation:
|
|
Year
ended December 31,
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Numerator
(Included in basic and diluted earnings per share)
|
$
|
3,092,671
|
$
|
2,184,985
|
$
|
1,797,481
|
||||
|
|
|
|
|
|||||||
|
Denominator
|
|
|
|
|||||||
|
Weighted
average common shares outstanding for:
|
|
|
|
|||||||
|
Basic
earnings per share
|
2,834,404
|
1,903,209
|
1,590,052
|
|||||||
|
Dilutive
securities:
|
|
|
|
|||||||
|
Stock
options - Treasury stock method
|
134,104
|
102,536
|
70,925
|
|||||||
|
Diluted
earnings per share
|
2,968,508
|
2,005,745
|
1,660,977
|
|||||||
The
average market price used in calculating the assumed number of shares issued
for
the years ended December 31, 2005, 2004 and 2003 was $19.15, $21.67 and $18.71,
respectively.
Note
18 -
CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The
Company and Bank are subject to various federal and state regulatory
requirements, including regulatory capital requirements. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company’s assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company’s and Bank’s capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weighting, and other factors. The Company and Bank are required to
maintain minimum Tier 1 capital, total risked based capital and Tier 1 leverage
ratios of 4%, 8% and 3%, respectively.
At
December 31, 2005, the most recent notification from the Comptroller of the
Currency categorized the bank as well capitalized under the regulatory framework
for prompt corrective action. To be well capitalized the bank must
maintain minimum Tier 1 capital, total risk- based capital and Tier 1 leverage
ratios of 6%, 10% and 5%, respectively. There are no conditions or events
since that notification that management believes have changed the bank’s well
capitalized status.
The
actual capital amounts and ratios as well as minimum amounts for each regulatory
defined category for the Bank and the Company are as follows:
|
|
Actual
|
Required
to be Categorized
Adequately
Capitalized
|
Required
to be
Categorized
Well
Capitalized
|
||||||||||||||||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
December
31, 2005
|
|
|
|
|
|
|
|||||||||||||
|
First
Community Corporation
|
|
|
|
|
|
|
|||||||||||||
|
Tier
1 Capital
|
$
|
40,898,000
|
13.24
|
%
|
$
|
12,354,000
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Total
Risked Based Capital
|
43,599,000
|
14.12
|
%
|
24,709,000
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
Tier
1 Leverage
|
40,898,000
|
9.29
|
%
|
17,616,000
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
First
Community Bank, NA
|
|
|
|
|
|
|
|||||||||||||
|
Tier
1 Capital
|
$
|
36,179,000
|
11.75
|
%
|
$
|
12,320,000
|
4.00
|
%
|
$
|
18,479,000
|
6.00
|
%
|
|||||||
|
Total
Risked Based Capital
|
38,880,000
|
12.62
|
%
|
24,640,000
|
8.00
|
%
|
30,799,000
|
10.00
|
%
|
||||||||||
|
Tier
1 Leverage
|
36,179,000
|
8.16
|
%
|
17,740,000
|
4.00
|
%
|
22,176,000
|
5.00
|
%
|
||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
December
31, 2004
|
|
|
|
|
|
|
|||||||||||||
|
First
Community Corporation
|
|
|
|
|
|
|
|||||||||||||
|
Tier
1 Capital
|
$
|
37,485,000
|
12.91
|
%
|
$
|
11,612,000
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Total
Risked Based Capital
|
40,249,000
|
13.86
|
%
|
23,224,000
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
Tier
1 Leverage
|
37,485,000
|
8.51
|
%
|
17,614,000
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
First
Community Bank, NA
|
|
|
|
|
|
|
|||||||||||||
|
Tier
1 Capital
|
$
|
33,158,000
|
11.46
|
%
|
$
|
11,576,000
|
4.00
|
%
|
$
|
17,364,000
|
6.00
|
%
|
|||||||
|
Total
Risked Based Capital
|
35,922,000
|
12.41
|
%
|
23,152,000
|
8.00
|
%
|
28,940,000
|
10.00
|
%
|
||||||||||
|
Tier
1 Leverage
|
33,158,000
|
7.64
|
%
|
17,367,000,
|
4.00
|
%
|
21,703,000
|
5.00
|
%
|
||||||||||
Under
applicable federal law, the Comptroller of the Currency restricts a national
bank’s total dividend payments in any calendar year to net profits of that year
combined ‘with retained net profits for the two preceding years At December 31,
2005 there was $6,347,000 of retained net profits free of such restriction.
Note
19 - PARENT COMPANY FINANCIAL INFORMATION
The
balance sheets, statements of operations and cash flows for First Community
Corporation (Parent Only) follow:
Condensed
Balance Sheets
|
|
At
December 31,
|
||||||
|
|
2005
|
2004
|
|||||
|
Assets:
|
|
|
|||||
|
Cash
on deposit
|
$
|
3,511,344
|
$
|
3,051,478
|
|||
|
Securities
purchased under agreement to resell
|
66,842
|
15,304
|
|||||
|
Investment
securities available-for-sale
|
1,360,000
|
1,360,000
|
|||||
|
Investment
in bank subsidiary
|
61,048,462
|
61,135,575
|
|||||
|
Other
|
494,154
|
537,321
|
|||||
|
Total
assets
|
$
|
66,480,802
|
$
|
66,099,678
|
|||
|
|
|
|
|||||
|
Liabilities:
|
|
|
|||||
|
Long-term
debt
|
$
|
15,464,000
|
$
|
15,464,000
|
|||
|
Other
|
250,017
|
172,989
|
|||||
|
Total
liabilities
|
15,714,017
|
15,636,989
|
|||||
|
|
|
|
|||||
|
Shareholders’
equity
|
50,766,785
|
50,462,689
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
66,480,802
|
$
|
66,099,678
|
|||
Condensed
Statements of Operations
|
|
Year
ended December 31,
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Income:
|
|
|
|
|||||||
|
Interest
income
|
$
|
51,323
|
$
|
72,795
|
$
|
75,711
|
||||
|
Dividend
income from bank subsidiary
|
1,327,125
|
366,000
|
225,160
|
|||||||
|
Equity
in undistributed earnings of subsidiary
|
2,715,875
|
2,073,865
|
1,556,937
|
|||||||
|
Total
income
|
4,094,323
|
2,512,660
|
1,857,808
|
|||||||
|
Expenses:
|
|
|
|
|||||||
|
Interest
expense
|
885,344
|
214,813
|
—
|
|||||||
|
Other
|
116,308
|
112,862
|
60,327
|
|||||||
|
Total
expense
|
1,001,652
|
327,675
|
60,327
|
|||||||
|
Income
before taxes
|
3,092,671
|
2,184,985
|
1,797,481
|
|||||||
|
Income
taxes
|
—
|
—
|
—
|
|||||||
|
Net
Income
|
$
|
3,092,671
|
$
|
2,184,985
|
$
|
1,797,481
|
||||
Condensed
Statements of Cash Flows
|
|
Year
ended December 31,
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Cash
flows from operating activities:
|
|
|
|
|||||||
|
Net
Income
|
$
|
3,092,671
|
$
|
2,184,985
|
$
|
1,797,481
|
||||
|
Adjustments
to reconcile net income to net cash used by operating
activities
|
|
|
|
|||||||
|
Increase
in equity in undistributed earnings of subsidiary
|
(2,715,875
|
)
|
(2,073,865
|
)
|
(1,556,937
|
)
|
||||
|
Other-net
|
120,200
|
84,600
|
(54,105
|
)
|
||||||
|
Net
cash provided (used) by operating activities
|
496,996
|
195,720
|
186,439
|
|||||||
|
|
|
|
|
|||||||
|
Cash
flows from investing activities:
|
|
|
|
|||||||
|
Purchase
of investment security available-for-sale
|
—
|
(110,000
|
)
|
(1,250,000
|
)
|
|||||
|
Maturity
of investment security available-for-sale
|
—
|
—
|
1,750,000
|
|||||||
|
Investment
in bank subsidiary
|
—
|
(2,897,905
|
)
|
—
|
||||||
|
Net
cash disbursed in business combination
|
—
|
(11,131,142
|
)
|
—
|
||||||
|
Net
cash provided (used) by investing activities
|
—
|
(14,139,047
|
)
|
500,000
|
||||||
|
|
|
|
|
|||||||
|
Cash
flows from financing activities:
|
|
|
|
|||||||
|
Cash
in lieu of fractional shares
|
—
|
—
|
—
|
|||||||
|
Dividends
paid
|
(565,432
|
)
|
(381,878
|
)
|
(301,973
|
)
|
||||
|
Proceeds
from issuance of long-term debt
|
—
|
15,000,000
|
—
|
|||||||
|
Proceeds
from issuance of common stock
|
579,840
|
315,430
|
100,586
|
|||||||
|
Net
cash provided by financing activities
|
14,408
|
14,933,552
|
(201,387
|
)
|
||||||
|
|
|
|
|
|||||||
|
Increase
in cash and cash equivalents
|
511,404
|
990,225
|
485,052
|
|||||||
|
Cash
and cash equivalent, beginning of period
|
3,066,782
|
2,076,557
|
1,591,505
|
|||||||
|
Cash
and cash equivalent, end of period
|
$
|
3,578,186
|
$
|
3,066,782
|
$
|
2,076,557
|
||||
Note
20 -
SUBSEQUENT EVENTS
On
January 19, 2006, the Company entered into an Agreement and Plan of Merger
(Agreement) with DeKalb Bankshares (DeKalb), the holding company for The Bank
of
Camden (Bank of Camden). The Agreement provides, among other things, that
DeKalb will merge with and into First Community with First Community as the
surviving entity. Immediately following the merger, Bank of Camden will
merge with and into First Community Bank, N.A., with First Community Bank,
N.A.
being the surviving entity.
Pursuant
to the Agreement, each share of DeKalb common stock issued and outstanding
immediately before the Effective Date (as defined in the Agreement) will be
converted into the right to receive $3.875 in cash and 0.60705 shares of First
Community common stock. Assuming no DeKalb shareholders exercise dissenters’
rights, and assuming the total number of outstanding shares of DeKalb common
stock immediately prior to the effective time is 610,139, First Community will
issue an aggregate of 370,384 shares of stock and $2,364,289 in
cash. Consummation
of the merger is subject to the satisfaction of certain conditions, including
approval of the Agreement by the shareholders of DeKalb and approval by the
appropriate regulatory agencies.
None.
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 December 31, 2005. There have been no
significant changes in our internal controls over financial reporting during
the
fourth fiscal quarter ended December 31, 2005 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.
Item
9B. Other Information
None.
The
information required by Item 10 is hereby incorporated by reference from
our
proxy statement for our 2006 annual meeting of shareholders to be held on
May
17, 2006.
We
have
adopted a Code of Ethics that applies to our directors, executive officers
(including our principal executive officer and principal financial officer)
and
employees in accordance with the Sarbanes-Oxley Corporate Responsibility
Act of
2002. The Code of Ethics is available on our web site at:
www.firstcommunitysc.com.
The
information required by Item 11 is hereby incorporated by reference from
our
proxy statement for our 2006 annual meeting of shareholders to be held on
May
17, 2006.
Item
12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
The
following table sets forth equity compensation plan information at December
31,
2005. All information has been adjusted for any stock splits and stock
dividends effected during the periods presented.
|
|
Equity
Compensation Plan Information
|
|||||||||
|
Plan
Category
|
Number
of securities
to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(c)
(excluding
securities
reflected
in column(a))
|
|||||||
|
|
(a)
|
(b)
|
|
|||||||
|
|
|
|
|
|||||||
|
Equity
compensation plans
approved
by security
holders(1)
|
147,407
|
$
|
15.10
|
104,750
|
||||||
|
|
|
|
|
|||||||
|
Total(2)
|
147,407
|
$
|
15.10
|
104,750
|
||||||
|
(1)
|
The
number of shares of common stock available for issuance under the
1999
Stock Incentive Plan automatically increases on the first trading
day each
calendar year beginning January 1, 2000, by an amount equal to 3%
of the
shares of common stock outstanding.
|
|
(2)
|
The
total does not include 180,685 shares with a weighted average exercise
price of $9.23 issuable under the First Community Corporation / DutchFork
Bancshares, Inc. Stock Incentive Plan. This plan and the outstanding
awards were assumed by us in connection with the merger with DutchFork
Bancshares, Inc. We are not authorized to make any additional awards
under this plan.
|
The
additional information required by this Item 12 is set forth under “Security
Ownership of Certain Beneficial Owners and Management” and hereby incorporated
by reference from our proxy statement for our 2006 annual meeting of
shareholders to be held on May 17, 2006.
The
information required by Item 13 is hereby incorporated by reference from our
proxy statement for our 2006 annual meeting of shareholders to be held on May
17, 2006.
The
information required by Item 14 is hereby incorporated by reference from our
proxy statement for our 2006 annual meeting of shareholders to be held on May
17, 2006.
(a)(1)
Financial Statements
The
following consolidated financial statements are located in Item 8 of this
report.
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2005 and 2004
Consolidated
Statements of Income for the years ended December 31, 2005, 2004 and
2003
Consolidated
Statements of Changes in shareholders’ Equity and Comprehensive Inc for the
years ended December 31, 2005, 2004 and 2003
Consolidated
Statements of Cash Flows for the years ended December 31, 2005, 2004 and
2003
Notes
to
the Consolidated Financial Statements
(2) Financial
Statement Schedules
These
schedules have been omitted because they are not required, are not applicable
or
have been included in our consolidated financial statements.
(3)
Exhibits
The
following exhibits are required to be filed with this Report on Form 10-K by
Item 601 of Regulation S-K.
2.1
Agreement
and Plan of Merger between First Community Corporation and DeKalb Bankshares,
Inc. dated January 19, 2006 (incorporated
by reference to Exhibit 2.1 of the company’s Form 8-K filed on January 20,
2006).
3.1
Amended
and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the company’s Registration Statement No. 33-86258 on
Form S-1).
3.2
Bylaws
(incorporated by reference to Exhibit 3.2 to the company’s Registration
Statement No. 33-86258 on Form S-1).
4.1
Provisions
in the company’s Articles of Incorporation and Bylaws defining the rights of
holders of
the
company’s Common Stock (incorporated by reference to Exhibit 4.1 to the
company’s Registration Statement No. 33-86258 on
Form S-1).
10.1
Employment
Agreement dated June 1, 1994, by and between Michael C. Crapps and the
Company (incorporated by reference to Exhibit 10.1 to the company’s
Registration Statement No. 33-86258 on Form S-1).*
10.2
Employment
Agreement dated June 1, 1994, by and between James C. Leventis and the
Company (incorporated by reference to Exhibit 10.2 to the company’s Registration
Statement No. 33-86258 on Form S-1).*
10.3
1996
Stock Option Plan and Form of Option Agreement (incorporated by reference to
Exhibit 10.6 to the company’s annual report for fiscal year ended December 31,
1995 on Form 10-KSB).*
10.4
First
Community Corporation 1999 Stock Incentive Plan and Form of Option Agreement
(Incorporated by reference to the Company’s 1998 Annual Report and Form
10-KSB).*
10.5
Employment
Agreement dated September 2, 2002 by and between David K. Proctor and the
Company (incorporated by reference to Exhibit 10.4 to the company’s 2002
annual report and Form 10-KSB).*
10.6
Employment
Agreement dated June 12, 2002 by and between Joseph G. Sawyer and the
Company (incorporated by reference to Exhibit 10.5 to the company’s 2002
annual report and Form 10-KSB).*
10.7
First
Amendment to the First Community Corporation 1999 Stock Incentive
Plan.*
10.8
Agreement
between First Community Bank and Summerfield Associates, Inc. dated June 28,
2005 (incorporated by reference to Exhibit 10.1 of the company’s Form 8-K filed
on August 15, 2005).
|
10.9
|
Divided
Reinvestment Plan dated July 7, 2003 (incorporated by reference to
Form
S-3/D filed with the SEC on July 14, 2003, File No.
333-107009).*
|
|
10.10
|
Employment,
Consulting, and Noncompete Agreement between First Community Bank,
N.A.,
Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and Steve
P.
Sligh dated April 12, 2004 (incorporated by reference to Exhibit
10.6 to
the company’s Registration Statement No. 333-116242 on Form
S-4).*
|
|
10.11
|
Employment,
Consulting, and Noncompete Agreement between First Community Bank,
N.A.,
Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and J.
Thomas
Johnson dated April 12, 2004 (incorporated by reference to Exhibit
10.7 to
the company’s Registration Statement No. 333-116242 on Form
S-4).*
|
|
10.12
|
Amendment
No. 1 to the Employment, Consulting, and Noncompete Agreement between
First Community Bank N.A., and Steve P. Sligh dated September 14,
2005 (incorporated by reference to Exhibit 10.1 to the company’s Form 8-K
filed on September 15, 2005).*
|
21.1
Subsidiaries
of the company.
23
Consent
of Independent Registered Public Accounting Firm
24.1
Power
of
Attorney (contained on the signature page hereto).
31.1
Rule
13a-14(a) Certification of the Chief Executive Officer.
31.2
Rule
13a-14(a) Certification of the Chief Financial Officer.
32
Section
1350 Certifications.
| * Management contract of compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K. | ||
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
Date:
March 15, 2006
|
FIRST
COMMUNITY CORPORATION
|
|||
|
|
|
|||
|
|
|
|||
|
|
By:
|
/s/ Michael C. Crapps
|
|
|
|
|
|
|
Michael
C. Crapps
|
|
|
|
|
|
President
and Chief Executive Officer
|
|
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael C. Crapps, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and
in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all exhibits thereto,
and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto attorney-in-fact and agent full power and authority
to
do and perform each and every act and thing requisite or necessary to be done
in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that attorney-in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be
done
by virtue hereof.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of
the registrant and in the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|||
|
|
|
|
|
|
|||
|
/s/
Richard K. Bogan
|
|
Director
|
|
March
15, 2006
|
|||
|
Richard
K. Bogan
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
/s/
Thomas C. Brown
|
Director
|
March 15, 2006 | |||||
|
Thomas
C. Brown
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
/s/
Chimin J. Chao
|
|
Director
|
|
March
15, 2006
|
|||
|
Chimin
J. Chao
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
/s/
Michael C. Crapps
|
|
Director,
President,
|
|
March
15, 2006
|
|||
|
Michael
C. Crapps
|
|
&
Chief Executive Officer
|
|
|
|||
|
|
|
|
|
|
|||
|
/s/
Hinton G. Davis
|
Director
|
March
15, 2006
|
|||||
|
Hinton
G. Davis
|
|||||||
|
/s/
Anita B. Easter
|
|
Director
|
|
March
15, 2006
|
|||
|
Anita
B. Easter
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
/s/
O. A. Ethridge
|
|
Director
|
|
March
15, 2006
|
|||
|
O.
A. Ethridge
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
/s/
George H. Fann, Jr.
|
|
Director
|
|
March
15, 2006
|
|||
|
George
H. Fann, Jr.
|
|
|
|
|
|||
|
/s/
J. Thomas Johnson
|
Director,
Vice Chairman of the Board,
|
March
15, 2006
|
|||||
|
J.
Thomas Johnson
|
&
Executive Vice President
|
||||||
|
|
|
|
|
|
|||
|
/s/
W. James Kitchens, Jr.
|
|
Director
|
|
March
15, 2006
|
|||
|
W.
James Kitchens, Jr.
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
/s/
James C. Leventis
|
|
Director,
Chairman of the
|
|
March
15, 2006
|
|||
|
James
C. Leventis
|
|
Board,
& Secretary
|
|
|
|||
|
/s/Alexander
Snipes, Jr.
|
Director
|
March
15, 2006
|
||
|
Alexander
Snipes, Jr.
|
||||
|
/s/
Loretta R. Whitehead
|
Director
|
March
15, 2006
|
||
|
Loretta
R. Whitehead
|
||||
|
|
|
|
|
|
|
/s/
Mitchell M. Willoughby
|
|
Director
|
|
March
15, 2006
|
|
Mitchell
M. Willoughby
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Joseph G. Sawyer
|
|
Chief
Financial Officer
|
|
March
15, 2006
|
|
Joseph
G. Sawyer
|
|
and
Principal Accounting Officer
|
|
|
|
|
|
|
Exhibit
List
2.1
Agreement and Plan of Merger between First Community Corporation and DeKalb
Bankshares, Inc. dated January 19, 2006 (incorporated by reference to Exhibit
2.1 of the company’s Form 8-K filed on January 20, 2006).
3.1
Amended
and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the company’s Registration Statement No. 33-86258 on
Form S-1).
3.2
Bylaws
(incorporated by reference to Exhibit 3.2 to the company’s Registration
Statement No. 33-86258 on Form S-1).
4.1
Provisions
in the company’s Articles of Incorporation and Bylaws defining the rights of
holders of
the
company’s Common Stock (incorporated by reference to Exhibit 4.1 to the
company’s Registration Statement No. 33-86258 on
Form S-1).
10.1
Employment
Agreement dated June 1, 1994, by and between Michael C. Crapps and the
Company (incorporated by reference to Exhibit 10.1 to the company’s
Registration Statement No. 33-86258 on Form S-1).*
10.2
Employment
Agreement dated June 1, 1994, by and between James C. Leventis and the
Company (incorporated by reference to Exhibit 10.2 to the company’s Registration
Statement No. 33-86258 on Form S-1).*
10.3
1996
Stock Option Plan and Form of Option Agreement (incorporated by reference to
Exhibit 10.6 to the company’s annual report for fiscal year ended December 31,
1995 on Form 10-KSB).*
10.4
First
Community Corporation 1999 Stock Incentive Plan and Form of Option Agreement
(Incorporated by reference to the Company’s 1998 Annual Report and Form
10-KSB).*
10.5
Employment
Agreement dated September 2, 2002 by and between David K. Proctor and the
Company (incorporated by reference to Exhibit 10.4 to the company’s 2002
annual report and Form 10-KSB).*
10.6
Employment
Agreement dated June 12, 2002 by and between Joseph G. Sawyer and the
Company (incorporated by reference to Exhibit 10.5 to the company’s 2002
annual report and Form 10-KSB).*
10.7
First
Amendment to the First Community Corporation 1999 Stock Incentive
Plan.*
10.8
Agreement
between First Community Bank and Summerfield Associates, Inc. dated June 28,
2005 (incorporated by reference to Exhibit 10.1 of the company’s Form 8-K filed
on August 15, 2005).
|
10.9
|
Divided
Reinvestment Plan dated July 7, 2003 (incorporated by reference to
Form
S-3/D filed with the SEC on July 14, 2003, File No.
333-107009).*
|
|
10.10
|
Employment,
Consulting, and Noncompete Agreement between First Community Bank,
N.A.,
Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and Steve
P.
Sligh dated April 12, 2004 (incorporated by reference to Exhibit
10.6 to
the company’s Registration Statement No. 333-116242 on Form
S-4).
|
|
10.11
|
Employment,
Consulting, and Noncompete Agreement between First Community Bank,
N.A.,
Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and J.
Thomas
Johnson dated April 12, 2004 (incorporated by reference to Exhibit
10.7 to
the company’s Registration Statement No. 333-116242 on Form
S-4).
|
|
10.12
|
Amendment
No. 1 to the Employment, Consulting, and Noncompete Agreement between
First Community Bank, N.A. and Steve P. Sligh dated September 14,
2005 (incorporated by reference to Exhibit 10.1 to the company’s Form 8-K
filed on September 15, 2005).
|
21.1
Subsidiaries
of the company.
23
Consent
of Independent Registered Public Accounting Firm
24.1
Power
of
Attorney (contained on the signature page hereto).
31.1
Rule
13a-14(a) Certification of the Chief Executive Officer.
31.2
Rule
13a-14(a) Certification of the Chief Financial Officer.
32
Section
1350 Certifications.
65