As
filed
with the Securities and Exchange Commission on March 24, 2006
Registration
No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST
COMMUNITY CORPORATION
(Exact
name of registrant as specified in its charter)
South
Carolina
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6021
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57-1010751
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(State
or other jurisdiction of
incorporation
or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer Identification No.)
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5455
Sunset Blvd.
Lexington,
South Carolina 29072
(803)
951-2265
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Michael
C. Crapps
President
and Chief Executive Officer
First
Community Corporation
5455
Sunset Blvd
Lexington,
South Carolina 29072
(803)
951-2265
(Name,
address, including zip code, and telephone number, including area code of agent
for service)
Copies
to:
Neil
E. Grayson, Esq.
Jason
R. Wolfersberger, Esq.
Nelson
Mullins Riley & Scarborough LLP
Poinsett
Plaza, Suite 900
104
South Main Street
Greenville,
South Carolina 29601
(864)
250-2235
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George
S. King, Jr., Esq.
Haynsworth
Sinkler Boyd, P.A.
1201
Main Street, 22nd
Floor
Columbia,
South Carolina 29201
Fax:
(803) 765-1243
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Approximate
date of commencement of the proposed sale to the public: As soon as practicable
after the effectiveness of this registration statement and the satisfaction
or
waiver of all other conditions to the merger described in the proxy
statement/prospectus.
If
the
securities being registered on this form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box.
If
this
form is filed to register additional securities for an offering pursuant to
Rule
464(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
CALCULATION
OF REGISTRATION FEE
Title
of each class of
securities
to be registered
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Amount
to be
registered
(1)
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Proposed
maximum
offering
price
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Proposed
maximum
aggregate
offering price (3)
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Amount
of
registration
fee
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|
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Common
Stock
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441,612
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(2)
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$5,672,379
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$607
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(1)
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Based
upon the maximum number of shares of common stock of First Community
Corporation that may be issued in exchange for shares of common stock
of
DeKalb Bankshares, Inc. pursuant to the merger described in proxy
statement/prospectus which is a part of this registration statement.
Pursuant to Rule 416, this registration statement also covers an
indeterminate number of shares of common stock as may become issuable
as a
result of stock splits, stock dividends, or similar
transactions.
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(3)
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In
accordance with Rule 457(f)(1) and Rule 457(f)(3), the registration
fee is
based on (a) the maximum number of shares to be received by First
Community Corporation pursuant to the merger (698,139), multiplied
by
$12.00 (the fair market value of DeKalb Bankshares, Inc. common stock),
less (b) $2,705,289 (the maximum amount of cash to be paid by First
Community Corporation in the merger). For purposes of this calculation,
the registrant has assumed that all outstanding DeKalb options are
exercised prior to the consummation of the
merger.
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The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
[DeKalb
Bankshares Letterhead]
,
2006
Dear
DeKalb Bankshares, Inc. shareholder:
You
are
cordially invited to attend a special meeting of shareholders of DeKalb to
be
held on , 2006, at .m., local
time, at . At this
special
meeting,
you will be asked to approve the acquisition of DeKalb by First Community
Corporation and to approve the proposal to authorize the board of directors
to
adjourn the special meeting to allow time for further solicitation of proxies
in
the event there are insufficient votes at the special meeting to approve the
acquisition.
As
a
result of the acquisition, each share of DeKalb common stock will
be
converted into the right to receive $3.875 in cash and 0.60705
shares
of
First Community common stock. The
acquisition will be effected through the merger of DeKalb with and into First
Community. The aggregate amount of cash and shares of First Community common
stock received by DeKalb’s shareholders will be a function of the number of
shares of DeKalb common stock issued and outstanding at the effective time
of
the merger. DeKalb had shares of common
stock issued and outstanding as of , 2006. 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. First Community common stock is listed under
the
symbol “FCCO” on the NASDAQ Capital Market. The common stock of DeKalb is not
publicly traded.
In
addition, each outstanding DeKalb stock option will be converted into an option
to purchase 0.8094 shares of First Community common stock. The per share
exercise price under each option will be adjusted by dividing the per share
exercise price by 0.8094. All outstanding options will be exercisable for the
same period and will otherwise have the same terms and conditions applicable
to
the DeKalb options that they replace.
YOUR
VOTE IS VERY IMPORTANT.
We
cannot complete the merger unless, among other things, holders of at least
two-thirds of the outstanding shares of DeKalb approve the merger agreement.
Your
board of directors has approved the merger agreement, including the transactions
contemplated in that agreement, and recommends that you vote
“FOR”
the merger and “FOR”
the proposal to authorize adjournment.
Please
carefully review and consider this proxy statement/prospectus which explains
the
merger proposal in detail, including the discussion under the heading “Risk
Factors” beginning on page
.
It is
important that your shares are represented at the meeting, whether or not you
plan to attend. An abstention or a failure to vote will have the same effect
as
a vote against the merger. Accordingly, please complete, date, sign, and return
promptly your proxy card in the enclosed envelope. You may attend the meeting
and vote your shares in person if you wish, even if you have previously returned
your proxy.
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Sincerely, |
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William
C. Bochette, III |
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President
and Chief Executive Officer |
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved the securities to be issued under this proxy
statement/prospectus or determined if this proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The shares of First Community Corporation common stock are not savings or
deposit accounts or other obligations of any bank, savings association, or
non-bank subsidiary of either of our companies, and they are not insured by
the
Federal Deposit Insurance Corporation, the Savings Association Insurance Fund,
the Bank Insurance Fund, or any other governmental agency.
This
document is dated , 2006 and is first
being
mailed to DeKalb shareholders on or about , 2006.
ADDITIONAL
INFORMATION
This
proxy statement/prospectus incorporates important business and financial
information about First Community from documents that are not delivered with
this proxy statement/prospectus. This information is available to you without
charge upon your written or oral request. You can obtain documents incorporated
by reference in this proxy statement/prospectus by requesting them in writing
or
by telephone from First Community at the following addresses:
First
Community Corporation
5455
Sunset Blvd.
Lexington,
South Carolina 29072
Attention:
Michael C. Crapps, President and Chief Executive Officer
Telephone:
(803) 951-2265
If
you would like to request documents, please do so by [insert date within 5
days
of the special meeting], 2006 in order to receive them before the special
meeting.
See
“Where You Can Find More Information” on page for further
information.
DEKALB
BANKSHARES, INC.
631
West DeKalb Street
Camden,
South Carolina 29020
(803)
432-7575
NOTICE
OF SPECIAL MEETING OF SHAREHOLDERS
To
Be Held On ,
2006
To
the
Shareholders of DeKalb Bankshares, Inc.:
We
will
hold an special meeting of shareholders of DeKalb on , 2006, at .m., local
time,
at for the following purposes:
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1.
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To
consider and vote upon a proposal to approve the Agreement and Plan
of
Merger dated as of January 19, 2006, by and between First Community
Corporation and DeKalb, and the transactions contemplated by that
Agreement and Plan of Merger, pursuant to which DeKalb will merge
with and
into First Community, as more particularly described in the enclosed
proxy
statement/prospectus;
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2.
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To
consider and vote on a proposal to authorize the board of directors
to
adjourn the special meeting to allow time for further solicitation
of
proxies in the event there are insufficient votes present at the
meeting,
in person or by proxy, to approve the merger; and
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3.
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To
transact any other business as may properly be brought before the
DeKalb
special meeting or any adjournments or postponements of the DeKalb
special
meeting.
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Only
shareholders of record at the close of business on , 2006 will be entitled
to
vote to notice of, and to vote at, the meeting and any adjournments or
postponements of the meeting.
Whether
or not you plan to attend the special meeting in person, please complete, date,
sign, and return the enclosed proxy card in the accompanying pre-addressed
postage-page envelope as promptly as possible. Any DeKalb shareholder may revoke
his or her proxy by following the instructions in the proxy statement/prospectus
at any time before the proxy has been voted at the special meeting. Even if
you
have given your proxy, you may still vote in person if you attend the special
meeting. Please do not send any stock certificates to us at this time.
We
encourage you to vote on this very important matter. The
Board of Directors of DeKalb unanimously recommends that DeKalb shareholders
vote “FOR”
the proposals above.
DeKalb
shareholders are or may be entitled to assert dissenters’ rights under Chapter
13 of the South Carolina Business Corporation Act of 1988. Your right to dissent
is conditioned upon your compliance with the South Carolina statutes regarding
dissenters’ rights. The full text of these statutes is attached as Appendix B to
the accompanying proxy statement/prospectus and a summary of the provisions
can
be found under the caption "The Merger—Rights of Dissenting DeKalb
Shareholders."
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By
Order of the Board of Directors, |
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William
C. Bochette, III |
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President
and Chief Executive Officer |
Camden,
South Carolina
,
2006
Q:
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Why
is DeKalb merging with and into First Community?
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A: DeKalb
is
merging with and into First Community because the boards of directors of both
companies believe that the merger will provide shareholders of both companies
with substantial benefits and will enable the combined company to better serve
its customers. The products and markets of First Community and DeKalb are
generally complementary, and the merger should place the combined company in
a
better position to take advantage of those markets.
Q: What
am I being asked to vote on and how does the board recommend that I
vote?
A: You
are
being asked to vote FOR the approval of the Agreement and Plan of Merger dated
as of January 19, 2006, providing for the merger of DeKalb with and into First
Community. The board of directors of DeKalb determined that the proposed merger
is in the best interests of DeKalb’s shareholders, approved the merger
agreement, and recommends that you vote "FOR" the approval of the merger. In
addition, you are being asked to grant authority to the board of directors
to
adjourn the special meeting to allow time for further solicitation of proxies
in
the event there are insufficient votes present at the special meeting, in person
or by proxy, to approve the merger.
Q: What
will I receive in the merger?
A:
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In
the merger, each share of DeKalb common stock will be converted into
the
right to receive $3.875 in cash and 0.60705 shares of First Community
common stock. In addition, each outstanding DeKalb stock option will
be
converted into an option to purchase 0.8094 shares of First Community
common stock. The per share exercise price under each option will
be
adjusted by dividing the per share exercise price by 0.8094. All
outstanding options will be exercisable for the same period and will
otherwise have the same terms and conditions applicable to the DeKalb
options that they replace.
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Q:
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Can
I elect the type of consideration that I will receive in the
merger?
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A:
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No.
Each DeKalb shareholder will receive cash and shares of First Community
common stock as described above.
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Q:
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Will
DeKalb shareholders be taxed on the cash and First Community common
stock
that they receive in exchange for their DeKalb
shares?
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A:
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We
expect the merger to qualify as a reorganization for United States
Federal
income tax purposes. If the merger qualifies as a reorganization
for
United States Federal income tax purposes, DeKalb shareholders will
not
recognize any gain or loss to the extent DeKalb shareholders receive
First
Community common stock in exchange for their DeKalb shares. However,
DeKalb shareholders will recognize capital gain, but not loss, to
the
extent of the amount of cash received. We recommend that DeKalb
shareholders carefully read the complete explanation of the material
United States federal income tax consequences of the merger beginning
on
page , and that DeKalb shareholders consult their own tax advisors
for a
full understanding of the tax consequences of their participation
in the
merger.
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Q: What
should I do now?
A:
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After
you have carefully read this document, please indicate on your proxy
card
how you want to vote, and then date, sign, and mail your proxy card
in the
enclosed envelope as soon as possible so that your shares will be
represented at the meeting. If you date, sign, and send in a proxy
card
but do not indicate how you want to vote, your proxy will be voted
in
favor of the merger proposal.
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Q: Why
is my vote important?
A:
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The
merger proposal must be approved by holders of at least two-thirds
of the
outstanding shares of DeKalb entitled to vote at the special meeting.
Accordingly, if a DeKalb shareholder fails to vote on the merger,
it will
have the same effect as a vote against the merger proposal.
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Q: If
my shares are held in “street name” by my broker, will my broker vote my shares
for me?
A:
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Your
broker will vote your shares on the merger proposal only if you provide
instructions on how to vote. You should instruct your broker how
to vote
your shares following the directions your broker provides. Failure
to
instruct your broker how to vote your shares will be the equivalent
of
voting against the merger proposal.
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Q: Can
I change my vote after I have submitted my proxy?
A:
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Yes.
There are three ways you can change your vote. First, you may send
a
written notice to the person to whom you submitted your proxy stating
that
you would like to revoke your proxy. Second, you may complete and
submit a
later-dated proxy with new voting instructions. The latest vote actually
received by DeKalb prior to the special meeting will be your vote.
Any
earlier votes will be revoked. Third, you may attend the special
meeting
and vote in person. Any earlier votes will be revoked. Simply attending
the special meeting without voting, however, will not revoke your
proxy.
If you have instructed a broker to vote your shares, you must follow
the
directions you will receive from your broker to change or revoke
your
proxy.
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Q:
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Do
I have the right to dissent and obtain the fair value for my
shares?
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A:
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Yes.
If the merger is completed, you will have the right to dissent and
receive
the “fair value” of your shares in cash, but you must follow carefully the
requirements of the South Carolina statutes which are attached as
Appendix
B to this proxy statement/prospectus, and should consult with your
own
legal counsel. For a description of these requirements, see “The
Merger—Rights of Dissenting DeKalb
Shareholders.”
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Q: Should
I send in my stock certificates now?
A:
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No.
You should not send in your stock certificates at this time. Promptly
after the effective time of the merger, you will receive transmittal
materials with instructions for surrendering your DeKalb shares.
You
should follow the instructions in the post-closing letter of transmittal
regarding how and when to surrender your stock
certificates.
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Q:
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When
do you expect to complete the
merger?
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A:
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We
presently expect to complete the merger in the late
second or early third quarter of 2006.
However, we cannot assure you when or if the merger will occur. We
must
first obtain the approval of DeKalb shareholders at the special meeting
and the necessary regulatory approvals.
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Q: Whom
should I call with questions about the merger?
A:
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DeKalb
shareholders may contact William C. Bochette, III, president and
chief
executive officer of DeKalb, at (803) 432-7575. You can also find
more
information about DeKalb and First Community from various sources
described under “Additional Information” and “Where You Can Find More
Information” of this proxy
statement/prospectus.
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This
summary highlights selected information from this proxy statement/prospectus.
It
may not contain all of the information that is important to you. To better
understand the merger and its potential impact on you, we urge you to read
this
entire document carefully, including the exhibits and enclosures. Each item
in
this summary includes a page reference directing you to a more complete
discussion of the item.
The
Companies (page )
First
Community Corporation
5455
Sunset Blvd.
Lexington,
South Carolina 29072
Attention:
Michael C. Crapps, President and Chief Executive Officer
Telephone:
(803) 951-2265
First
Community is a South Carolina corporation and is registered as a bank holding
company with the Federal Reserve Board. First
Community engages in a general banking business through its subsidiary, First
Community Bank, N.A., a national banking association which commenced operations
in August 1995. First Community’s executive office is in Lexington, South
Carolina. First Community Bank operates 11 full-service offices located in
Lexington (two), Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin,
Northeast Columbia, Prosperity, and Newberry (two).
DeKalb
Bankshares, Inc.
631
West
DeKalb Street
Camden,
South Carolina 29020
Telephone:
(803) 432-7575
DeKalb
is
a South Carolina corporation and is registered as a bank holding company with
the Federal Reserve Board. DeKalb engages in a general banking business through
its subsidiary, Bank of Camden, a South Carolina chartered commercial bank
which
commenced operations in February 2001. DeKalb’s executive office is in Camden,
South Carolina. Bank of Camden operates one banking office located in Camden,
South Carolina.
The
Merger (page )
The
merger agreement is attached as Appendix A to this document. You should read
the
merger agreement because it is the legal document that governs the merger.
The
merger agreement provides for the merger of DeKalb with and into First
Community. In addition, DeKalb’s wholly owned subsidiary, the Bank of Camden,
will be merged with and into First Community’s wholly owned subsidiary, First
Community Bank, N.A. Upon the closing of the merger, each share of DeKalb common
stock will be converted into the right to receive $3.875 in cash and 0.60705
shares of First Community common stock. In addition, each outstanding DeKalb
stock option will be converted into an option to purchase 0.8094 shares of
First
Community common stock. The per share exercise price under each option will
be
adjusted by dividing the per share exercise price by 0.8094. All outstanding
options will be exercisable for the same period and will otherwise have the
same
terms and conditions applicable to the DeKalb options that they replace.
Reasons
for the Merger (page )
In
reaching its decision to adopt and approve the merger agreement and recommend
the merger to its shareholders, the DeKalb board of directors consulted with
DeKalb management, as well as its legal and financial advisors, and considered
a
number of factors, including:
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·
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A
review of DeKalb’s current business, operations, earnings, and financial
condition and reasonable expectations of future performance and
operations;
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·
The
terms
of the First Community’s offer, including both the amount and nature of the
consideration proposed to be paid in comparison to other similar transactions
occurring in the recent past within South Carolina;
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·
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The
recent market performance of First Community common stock, as well
as the
recent earnings performance and dividend payment history of First
Community;
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·
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The
belief of the DeKalb board of directors that the terms of the agreement
and plan of merger are attractive in that the agreement and plan
of merger
allow DeKalb’s shareholders to become shareholders in First Community and
receive a substantial cash payment;
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·
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The
difficulty of remaining independent in close proximity to the Columbia
market and risks of de novo branching into the Columbia market
versus the
benefits of combining with an institution with a significant Columbia
market presence;
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·
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The
alternatives to the merger, including remaining an independent
institution;
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·
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The
competitive and regulatory environment for financial institutions
generally;
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·
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The
wide range of banking products and services First Community offers
to its
customers;
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·
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The
impact of the proposed merger on DeKalb’s employees and the Camden
community;
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·
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The
belief of DeKalb’s board of directors, based upon analysis of the
anticipated financial effects of the merger, that upon consummation
of the
merger, First Community and its banking subsidiaries would remain
well-capitalized institutions, the financial positions of which
would be
in excess of all applicable regulatory capital
requirements;
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·
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The
Orr Group, LLC’s opinion that the consideration DeKalb shareholders will
receive as a result of the merger is fair from a financial point
of
view;
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·
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The
belief of DeKalb’s board of directors that, in light of the reasons
discussed above, First Community was an attractive choice as a
long-term
affiliation partner of DeKalb; and
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|
·
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The
expectation that the merger will generally be a tax-free transaction
to
DeKalb shareholders with respect to the First Community common
stock
received by virtue of the merger. See “Federal Income Tax
Consequences.”
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In
addition, DeKalb’s board knew and considered the financial interests of certain
DeKalb directors and executives when it approved the merger agreement. These
financial interests are addressed in greater detail under the heading “The
Merger - Interests of Directors and Officers of DeKalb that Differ from Your
Interests.”
Regulatory
Approvals (page )
We
cannot
complete our merger unless we obtain the approval of the Board of Governors
of
the Federal Reserve System and the South Carolina State Board of Financial
Institutions. As of the date of this document, we have not yet received the
required regulatory approvals. Although we expect to obtain the necessary
approvals in a timely manner, we cannot be certain when, or if, they will be
received.
DeKalb
Shareholders’ Meeting (page )
DeKalb
will hold its shareholders’ special meeting on , 2006, at .m., local time, at .
At the special meeting, DeKalb shareholders will be asked to vote to approve
the
merger proposal and the proposal to authorize the board of directors to adjourn
the special meeting to allow time for further solicitation of proxies in the
event there are insufficient votes at the special meeting, in person or by
proxy, to approve the merger proposal.
DeKalb
Shareholders’ Meeting Record Date and Voting (page )
If
you
owned shares of DeKalb at the close of business on , 2006, the record
date, you are entitled to vote on the merger proposal, as well as any other
matters considered at the meeting. On the record date, there were [ ] shares
of
DeKalb stock outstanding. You will have one vote at the meeting for each share
of DeKalb stock you owned on the record date. The affirmative vote of the
holders of at least two-thirds of DeKalb outstanding shares of common stock
is
required to approve the merger proposal. As of , 2006, DeKalb’s
current directors, executive officers, and their affiliates beneficially owned
approximately % of the outstanding
shares of DeKalb common stock. Each of DeKalb’s directors and executive officers
has agreed, subject to several conditions, to vote his or her shares of DeKalb
common stock in favor of the merger proposal.
The
Board of Directors of DeKalb Recommends Shareholder Approval (page
)
The
board
of directors of DeKalb has approved the merger proposal, believes that the
merger proposal is in the best interest of DeKalb and its shareholders, and
recommends that the shareholders vote “FOR”
approval
of the merger proposal.
The
Financial Advisor for DeKalb Believes the Merger Proposal Consideration is
Fair
to DeKalb Shareholders (page )
The
Orr
Group, LLC has served as financial advisor to DeKalb in connection with the
merger proposal and has given an opinion to the DeKalb board of directors that,
as of January 17, 2006, the date the DeKalb board of directors voted on the
merger proposal, the consideration First Community will pay for the DeKalb
common stock is fair to DeKalb shareholders from a financial point of view.
A
copy of the opinion delivered by The Orr Group, LLC is attached to this proxy
statement/prospectus as Appendix C. DeKalb shareholders should read the opinion
completely to understand the assumptions made, matters considered, and
limitations of the review undertaken by The Orr Group, LLC in providing its
opinion.
Interests
of Directors and Officers of DeKalb that Differ from Your Interests (page
)
When
considering the recommendations of the DeKalb board of directors, you should
be
aware that some directors and officers have interests in the merger proposal
that differ from the interests of other shareholders, including the following:
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·
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Following
the merger, one
current DeKalb director, who has not yet been selected, will be appointed
to the board of directors of First
Community;
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|
·
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Following
the merger, seven current DeKalb directors will be appointed to an
advisory board of First Community Bank and will be paid advisory
fees to
these individuals for these
services;
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|
·
|
Following
the merger, William
C. Bochette, III will serve as a senior vice president of First Community
Bank. In addition to an annual salary of $150,000 and benefits, he
will
also receive a lump sum payment of $400,000 in connection with the
termination of his existing employment agreement with
DeKalb;
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|
·
|
Following
the merger, First Community will generally indemnify and provide
liability
insurance for up to three years following the merger to the present
directors and officers of DeKalb, subject to certain exceptions.
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Each
board member was aware of these and other interests and considered them before
approving and adopting the merger proposal.
Federal
Income Tax Consequences (page )
We
have
structured the merger so that it will be considered a reorganization for
United
States federal income tax purposes. If the merger is a reorganization for
United
States federal income tax purposes, DeKalb
shareholders
generally will not recognize any gain or loss on the exchange of shares of
DeKalb common stock for shares of First Community common stock. However, DeKalb
shareholders will recognize gain, but not loss, for federal income tax purposes,
to the extent of the cash they receive in the exchange. Such gain will be a
capital gain, provided that such shares were held as capital assets of the
DeKalb shareholder at the effective time of the merger. Determining the actual
tax consequences of the merger to a DeKalb shareholder may be complex. These
tax
consequences will depend on each shareholder’s specific situation and on factors
not within our control. DeKalb shareholders should consult their own tax
advisors for a full understanding of the tax consequences of their participation
in the merger.
Comparative
Rights of Shareholders (page )
The
rights of DeKalb shareholders are currently governed by South Carolina corporate
law and DeKalb’s articles of incorporation and bylaws. The rights of First
Community shareholders are currently governed by South Carolina corporate law
and First Community’s articles of incorporation and bylaws. Upon consummation of
the merger, the shareholders of DeKalb will become shareholders of First
Community and the articles of incorporation and bylaws of First Community will
govern their rights. First Community’s articles of incorporation and bylaws
differ somewhat from those of DeKalb.
Termination
of the Merger Agreement (page )
Notwithstanding
the approval of the merger proposal by DeKalb shareholders, DeKalb and First
Community can mutually agree at any time to terminate the merger agreement
before completing the merger.
Either
DeKalb or First Community can also terminate the merger agreement:
|
·
|
If
the other party materially violates any of its representations or
warranties under the merger agreement and fails to cure the
violation;
|
|
·
|
If
required regulatory approval is denied by final nonappealable action
of
such regulatory authority or if any action taken by such authority
is not
appealed within the time limit for
appeal;
|
|
·
|
If
any law or order permanently restraining, enjoining, or otherwise
prohibiting the consummation of the merger shall have become final
and
nonappealable;
|
|
·
|
If
DeKalb shareholder approval is not obtained at the special meeting;
or
|
|
·
|
If
we do not complete the merger by October 31,
2006.
|
First
Community can also terminate the merger agreement, provided that it is not
in
material breach of any representation, warranty, or covenant, or other agreement
in the merger agreement, and the DeKalb shareholders have not approved the
merger:
|
·
|
If
the DeKalb board of directors fails to reaffirm its approval upon
First
Community’s request for such reaffirmation of the merger or if the DeKalb
board of directors resolves not to reaffirm the
merger;
|
|
·
|
If
the DeKalb board of directors withdraws, qualifies, modifies, or
proposes
publicly to withdraw, qualify, or modify, in a manner adverse to
First
Community, its recommendation that the shareholders approve the
merger;
|
|
·
|
If
the DeKalb board of directors affirms, recommends, or authorizes
entering
into any acquisition transaction other than the merger or, within
five
business days after commencement of any tender or exchange offer
for any
shares of its common stock, the DeKalb board of directors makes any
recommendation other than against such tender or exchange offer;
or
|
|
·
|
If
the DeKalb board of directors negotiates or authorizes the conduct
of
negotiations (and five business days have elapsed without such
negotiations being discontinued) with a third party regarding an
acquisition proposal other than the
merger.
|
First
Community may also terminate the merger agreement if at any time during the
three business day period commencing on the Determination Date (as defined
in
the merger agreement) the final FCCO Stock Price (as defined in the merger
agreement) is greater than $22.98. Within three business days of receiving
First
Community’s notice of termination, DeKalb will have the option of decreasing the
per share purchase price to be received by DeKalb shareholders so that it would
equal $22.98.
DeKalb
can terminate the merger agreement, provided that it is not in material breach
of any representation, warranty, or covenant, or other agreement in the merger
agreement, if, prior to the adoption of the merger agreement by the shareholders
at the special meeting, the DeKalb board of directors has (x) withdrawn or
modified or changed its recommendation or approval of the merger agreement
in a
manner adverse to First Community in order to approve and permit DeKalb to
accept a superior proposal and (y) determined, after consultation with and
the
receipt
of
advice from outside legal counsel to DeKalb, that the failure to take such
action would be likely to result in a breach of the board of directors’
fiduciary duties under applicable law.
DeKalb
may also terminate the Agreement if at any time during the three business day
period commencing on the Determination Date (as defined in the merger agreement)
the final FCCO Stock Price (as defined in the merger agreement) is greater
than
$15.32. Within three business days of receiving DeKalb’s notice of termination,
First Community will have the option of increasing the per share purchase price
to be received by DeKalb shareholders so that it would equal
$15.32.
DeKalb
Must Pay First Community a Termination Fee Under Certain Circumstances
(page )
The
merger agreement provides for the reimbursement of First Community’s
out-of-
pocket expenses,
not to
exceed $150,000, if First Community terminates the merger agreement
because:
|
·
|
the
DeKalb board of directors fails to reaffirm its approval upon First
Community’s request for such reaffirmation of the merger or the DeKalb
board of directors resolves not to reaffirm the
merger;
|
|
·
|
the
DeKalb board of directors fails to include in the proxy statement
its
recommendation, without modification or qualification, that the
shareholders approve the merger or the DeKalb board of directors
withdraws, qualifies, modifies, or proposes publicly to withdraw,
qualify,
or modify, in a manner adverse to First Community, the recommendation
that
the shareholders approve the
merger;
|
|
·
|
the
DeKalb board of directors affirms, recommends, or authorizes entering
into
any acquisition transaction other than the merger or, within five
business
days after commencement of any tender or exchange offer for any shares
of
its common stock, the DeKalb board of directors makes any recommendation
other than against acceptance of such tender or exchange offer;
or
|
|
·
|
the
DeKalb board of directors negotiates or authorizes the conduct of
negotiations (and five business days have elapsed without such
negotiations being discontinued) with a third party regarding an
acquisition proposal other than the
merger.
|
If
within
12 months after such termination DeKalb consummates another acquisition
transaction (as defined in the merger agreement), DeKalb must pay an additional
$500,000 termination fee (less the amount paid for First Community’s out-of-
pocket expenses).
If
the
board of directors of DeKalb determines, after consultation with legal counsel,
that in light of a superior proposal (as defined in the merger agreement),
it is
necessary to terminate the agreement to comply with its fiduciary duties, and
within 12 months of such termination an acquisition transaction has been
announced or an acquisition agreement has been entered into by DeKalb, DeKalb
must pay First Community’s out-of- pocket expenses as described above. If within
12 months after such termination, DeKalb consummates the acquisition
transaction, DeKalb must pay the additional termination fee as described
above.
Finally,
if the merger agreement is terminated following the commencement of any tender
or exchange offer for more than 50% of the shares of DeKalb and within 12 moths
of such termination an acquisition transaction has occurred involving the tender
offeror or its affiliates and DeKalb, then DeKalb must reimburse First
Community’s out-of-pocket expenses and pay the additional termination as
described above.
Dissenters’
Rights (page )
South
Carolina law permits DeKalb shareholders to dissent from the approval of the
merger proposal and to have the fair value of their DeKalb shares paid to them
in cash. To do this, DeKalb shareholders must follow specific procedures,
including filing a written notice with DeKalb prior
to the shareholder vote on the merger proposal. If
you
follow the required procedures, your only right will be to receive the fair
value of your common stock in cash. Copies of the applicable South Carolina
statutes are attached to this document as Appendix B.
The
Merger is Expected to Occur in the Late Second or Early Third Quarter of 2006
(page )
The
merger will occur shortly after all of the conditions to its completion have
been satisfied or waived. Currently, we anticipate that the merger will occur
in
the late second or early third quarter of 2006. However, we cannot assure you
when or if the merger will occur. We must first obtain the approval of the
DeKalb shareholders at the special meeting and all the necessary regulatory
approvals.
Accounting
Treatment (page )
The
merger will be accounted for using the purchase method of accounting, with
First
Community being treated as the acquiring entity for accounting purposes. Under
the purchase method of accounting, the assets and liabilities of DeKalb as
of
the effective time of the merger will be recorded at their respective fair
values and added to those of First Community.
Completion
of the Merger is Subject to Certain Conditions (page
)
Completion
of the merger is subject to a number of conditions, including the approval
of
the merger proposal by DeKalb shareholders and the receipt of all the regulatory
consents and approvals that are necessary to permit the completion of the
merger. Certain conditions to the merger may be waived by First Community or
DeKalb, as applicable.
Comparative
Market Value of Securities (page )
The
following table sets forth the closing price per share of First Community common
stock and the closing price per share of DeKalb on December 8, 2005 (the last
business day preceding the public announcement of the proposed merger) and
,
2006 (the most recent practicable trading date prior to the mailing the proxy
statement/prospectus). The table also presents the equivalent market value
per
share of DeKalb common stock assuming that the consideration for the transaction
is 0.60705 of a share of First Community common stock and $3.875 in cash for
each share outstanding of DeKalb common stock.
|
First
Community
Common
Stock
|
DeKalb
Common
Stock
|
Equivalent
Price Per Share of
DeKalb
Common Stock (2)
|
December 8, 2005
|
$19.25
|
$12.00(1)
|
$15.56
|
,
2006
|
|
|
|
|
(1)
|
The
price of the last known sale preceding December 8,
2005.
|
|
(2)
|
The
equivalent prices per share of DeKalb common stock have been calculated
by
multiplying the closing price per share of First Community common
stock on
each of the two dates by the exchange ratio of 0.60705 and adding
$3.875.
|
Because
the exchange ratio is fixed and because the market price of First Community
common stock is subject to fluctuation, the market value of the shares of First
Community common stock that you may
receive
in the merger may increase or decrease prior to and following the merger. You
are urged to obtain current market quotations for First Community common
stock.
Comparative
Per Share Data
The
following table shows income per common share, dividends per share, book value
per share, and similar information as if the merger had occurred on the dates
indicated (which are referred to as "pro forma" information). In presenting
the
comparative pro forma information for certain time periods, it was assumed
that
First Community and DeKalb had been merged throughout those periods and made
certain other assumptions. The ability of First Community to pay dividends
will
be completely dependent upon the amount of dividends its subsidiary, First
Community Bank, is permitted to pay to First Community. The ability of the
bank
to pay dividends is restricted under applicable law and regulations. For a
description of those restrictions, see the section entitled “Description of
First Community’s Capital Stock - Dividends Rights.”
The
information listed as "DeKalb Pro Forma Equivalent" was obtained by multiplying
the pro forma amounts by an exchange ratio of 0.60705. First Community and
DeKalb also anticipate that the combined company will derive financial benefits
from the merger that include reduced operating expenses and the opportunity
to
earn more revenue. The pro forma information, while helpful in illustrating
the
financial characteristics of the new company under one set of assumptions,
does
not reflect these benefits and, accordingly, does not attempt to predict or
suggest future results. The pro forma information also does not necessarily
reflect what the historical results of the combined company would have been
had
the companies been combined during these periods.
For
the Twelve Months Ended December 31, 2005
|
|
|
|
|
DeKalb
Historical
|
|
First
Community
Historical
|
|
Pro
Forma
Combined
|
|
DeKalb
Pro Forma
Equivalent
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income per share, basic
|
|
$
|
0.17
|
|
$
|
1.09
|
|
$
|
1.00
|
|
$
|
0.61
|
|
Net
Income per share, diluted
|
|
$
|
0.17
|
|
$
|
1.04
|
|
$
|
0.95
|
|
$
|
0.58
|
|
Dividends
declared per share
|
|
$
|
0.00
|
|
$
|
0.20
|
|
$
|
0.20
|
|
$
|
0.12
|
|
Book
value per share
|
|
$
|
8.45
|
|
$
|
17.82
|
|
$
|
17.98
|
|
$
|
10.91
|
|
The
following selected financial data for the years ended December 31, 2001 through
2005 is derived from the financial statements and other data of First Community.
The selected financial data should be read in conjunction with the financial
statements of First Community, including the accompanying notes, included
elsewhere herein.
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.
|
The
following selected financial data for the years ended December 31, 2005, 2004
and 2003 is derived from the financial statements and other data of DeKalb.
The
selected financial data should be read in conjunction with the financial
statements of DeKalb, including the accompanying notes, included elsewhere
herein.
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
2,436
|
|
$
|
1,977
|
|
$
|
1,523
|
|
Interest
expense
|
|
|
936
|
|
|
576
|
|
|
429
|
|
Net
interest income
|
|
|
1,500
|
|
|
1,401
|
|
|
1,094
|
|
Provision
for loan losses
|
|
|
58
|
|
|
109
|
|
|
95
|
|
Net
interest income after provision for loan losses
|
|
|
1,442
|
|
|
1,292
|
|
|
999
|
|
Noninterest
income
|
|
|
393
|
|
|
224
|
|
|
347
|
|
Noninterest
expense
|
|
|
1,649
|
|
|
1,376
|
|
|
1,265
|
|
Income
before income taxes
|
|
|
186
|
|
|
140
|
|
|
81
|
|
Income
tax expense
|
|
|
80
|
|
|
52
|
|
|
31
|
|
Net
income
|
|
$
|
106
|
|
$
|
88
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
46,326
|
|
$
|
42,560
|
|
$
|
33,035
|
|
Earning
assets
|
|
|
44,025
|
|
|
40,262
|
|
|
31,058
|
|
Securities
(1)
|
|
|
11,032
|
|
|
9,594
|
|
|
7,159
|
|
Loans
(2)
|
|
|
30,532
|
|
|
26,643
|
|
|
21,504
|
|
Allowance
for loan losses
|
|
|
305
|
|
|
266
|
|
|
305
|
|
Deposits
|
|
|
30,301
|
|
|
28,310
|
|
|
23,847
|
|
Interest-bearing
liabilities
|
|
|
37,921
|
|
|
34,421
|
|
|
25,532
|
|
Shareholders’
equity
|
|
|
5,158
|
|
|
5,192
|
|
|
5,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Per-Share
Data:
|
|
|
|
|
|
|
|
|
|
|
Earnings
per-share
|
|
$
|
0.17
|
|
$
|
0.14
|
|
$
|
0.08
|
|
Book
value (period end)
|
|
|
8.45
|
|
|
8.51
|
|
|
8.39
|
|
Tangible
book value (period end)
|
|
|
8.45
|
|
|
8.51
|
|
|
8.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Ratios:
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
0.24
|
%
|
|
0.23
|
%
|
|
0.17
|
%
|
Return
on average equity
|
|
|
2.42
|
%
|
|
1.70
|
%
|
|
0.98
|
%
|
Net
interest margin (3)
|
|
|
3.60
|
%
|
|
3.72
|
%
|
|
4.22
|
%
|
Efficiency
(4)
|
|
|
87.11
|
%
|
|
84.68
|
%
|
|
90.38
|
%
|
Average
equity to average assets
|
|
|
11.85
|
%
|
|
13.41
|
%
|
|
17.88
|
|
______________________
(1)
All
securities are available for sale and are stated at fair value.
(2)
Loans
are
stated at gross amounts before allowance for loan losses.
(3)
Net
interest income divided by average earning assets.
(4)
|
Noninterest
expense divided by the sum of net interest income and noninterest
income,
net of gains and losses on sales of
assets.
|
If
the merger is consummated, you will receive shares of First Community common
stock in exchange for your shares of DeKalb common stock. An investment in
First
Community common stock is subject to a number of risks and uncertainties, many
of which also apply to your existing investment in DeKalb common stock. Risks
and uncertainties relating to general economic conditions are not summarized
below. Those risks, among others, are highlighted on page under the heading “A
Warning About Forward-Looking Statements.”
However,
there are a number of other risks and uncertainties relating to First Community
and your decision on the merger proposal that you should consider in addition
to
the risks and uncertainties associated with financial institutions generally.
Many of these risks and uncertainties could affect First Community’s future
financial results and may cause First Community’s future earnings and financial
condition to be less favorable than First Community’s expectations. This section
summarizes those risks.
You
will experience a substantial reduction in percentage ownership and voting
power
with respect to your shares as a result of the merger.
DeKalb
shareholders will experience a substantial reduction in their respective
percentage ownership interests and effective voting power through their stock
ownership in First Community relative to their percentage ownership interest
in
DeKalb prior to the merger. If the merger is consummated, current DeKalb
shareholders will own approximately % of First Community
outstanding common stock, on a fully diluted basis, based on First Community
outstanding common stock as of , 2006. Accordingly,
even if they were to vote as a group, current DeKalb shareholders could be
outvoted by other First Community shareholders.
Because
the market price of First Community common stock may fluctuate, DeKalb
shareholders cannot be sure of the market value of the First Community common
stock that they may receive in the merger.
Upon
the
closing of the merger, each share of DeKalb common stock will automatically
be
converted into the right to receive $3.875 in cash and 0.60705 shares of First
Community common stock. Changes in the price of First Community common stock
from the date of the merger agreement and from the date of this proxy
statement/prospectus may affect the market value of First Community common
stock
that DeKalb shareholders will receive in the merger. Stock price changes may
result from a variety of factors, including general market and economic
conditions, changes in First Community's businesses, operations and prospects,
and regulatory considerations. Many of these factors are beyond First
Community's control. In addition, there will be a time period between the
completion of the merger and the time when DeKalb shareholders actually receive
certificates evidencing First Community common stock. Until stock certificates
are received, DeKalb shareholders will not be able to sell their First Community
shares in the open market and, thus, will not be able to avoid losses resulting
from any decline in the trading price of First Community common stock during
this period.
The
price of First Community common stock might decrease after the
merger.
Following
the merger, holders of DeKalb common stock will become shareholders of First
Community. First Community common stock could decline in value after the merger.
For example, during the 12 month period ending on , 2006 (the most
recent practicable date prior to the printing of this proxy
statement/prospectus), the closing price of First Community common stock varied
from a low of $ to a high of $
and
ended
that period at $ . The market value of
First Community common stock fluctuates based upon general market economic
conditions, First Community's business and prospects, and other
factors.
First
Community’s stock trading volume has been low compared with larger bank holding
companies.
The
trading volume in First Community’s common stock on the NASDAQ Capital Market
has been comparable to other similarly sized bank holding companies since
trading on the NASDAQ Capital Market began in January 2003. Nevertheless, this
trading volume does not compare with more seasoned companies listed on the
NASDAQ Capital Market or other stock exchanges. Thus, the market in First
Community’s common stock is somewhat limited in scope relative to some other
companies. In addition, First Community can provide no assurance that a more
active and liquid trading market for its stock will develop after the merger
is
consummated.
There
can be no assurance that First Community will continue to pay
dividends.
Although
First Community is currently paying a dividend of $0.05 per share per quarter
and expects to pay comparable dividends for the foreseeable future, there can
be
no assurance that First Community will continue to pay a dividend. The future
dividend policy of First Community is subject to the discretion of the board
of
directors and will depend upon a number of factors, including future earnings,
financial condition, capital and cash requirements, and general business
conditions. In addition, the ability of First Community to pay dividends will
be
completely dependent upon the amount of dividends its subsidiary, First
Community Bank, is permitted to pay to First Community. The ability of a bank
to
pay dividends is restricted under applicable law and regulations. For a
description of those restrictions, see the section entitled “Description of
First Community Common Stock - Dividends Rights.”
We
cannot guarantee the consummation of the contemplated
merger.
First
Community and DeKalb 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.
We
cannot predict the effect the acquisition will have on our operations if First
Community does not successfully integrate the operations of
DeKalb.
First
Community’s ability to achieve fully the expected benefits of the merger depends
on its successful integration of DeKalb. There is a risk that integrating DeKalb
into First Community’s existing operations may take a greater amount of
resources and time than we expect. Accordingly, there is a risk that the
anticipated benefits may not be realized or that they may be less than we expect
if we are unable to integrate in a timely manner, fail to realize cost savings
from the merger, or disrupt customer relationships.
This
proxy statement/prospectus, including information included or incorporated
by
reference in this document, contains forward-looking statements with respect
to
the financial condition, results of operations, plans, objectives, future
performance, and business of each of First Community and DeKalb, as well as
information relating to the merger. These statements are preceded by, followed
by, or include the words "believes," "expects," "anticipates," or "estimates,"
or similar expressions. Many
possible events or factors could affect our future financial results and
performance. This could cause our results or performance to differ materially
from those expressed in our forward-looking statements. You should consider
these important factors when you vote on the merger. Factors
that may cause actual results to differ materially from those contemplated
by
our forward-looking statements include the following:
|
·
|
our
operating costs after the merger may be greater than expected, and
our
cost savings from the merger may be less than expected, or we may
be
unable to obtain those cost savings as soon as
expected;
|
|
·
|
we
may be unable to successfully integrate DeKalb or we may have more
trouble
integrating acquired businesses than we
expected;
|
|
·
|
we
could lose our key personnel, including the DeKalb personnel we will
employ as a result of the merger, or spend a greater amount of resources
attracting, retaining, and motivating them than we have in the
past;
|
|
·
|
competition
among depository and other financial institutions may increase
significantly;
|
|
·
|
changes
in the interest rate environment may reduce operating
margins;
|
|
·
|
general
economic conditions, either nationally or in South Carolina, may
be less
favorable than expected resulting in, among other things, a deterioration
in credit quality and an increase in credit risk-related losses and
expenses;
|
|
·
|
loan
losses may exceed the level of allowance for loan losses of the combined
company;
|
|
·
|
the
rate of delinquencies and amount of charge-offs may be greater than
expected;
|
|
·
|
the
rates of loan growth may not increase as expected;
and
|
|
·
|
legislative
or regulatory changes may adversely affect our
businesses.
|
We
have
based our forward-looking statements on our current expectations about future
events. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee you that these
expectations actually will be achieved. We are under no duty to update any
of
the forward-looking statements after the date of this proxy statement/prospectus
to conform those statements to actual results. In evaluating these statements,
you should consider various factors, including the risks outlined in the section
entitled “Risk Factors,” beginning on page . You should also consider the
cautionary statements contained in First Community’s filings with the Securities
and Exchange Commission.
The
DeKalb board of directors is providing this proxy statement/prospectus to you
in
connection with its solicitation of proxies for use at the special meeting
of
DeKalb shareholders and at any adjournments or postponements of the special
meeting.
First
Community is also providing this proxy statement/prospectus to you as a
prospectus in connection with the offer and sale by First Community of shares
of
its common stock to shareholders of DeKalb in the merger.
Your
vote
is important. Please complete, date, and sign the enclosed proxy card and return
it in the postage prepaid envelope provided. If your shares are held in “street
name,” you should instruct your broker how to vote by following the directions
provided by your broker.
DeKalb
will hold the special meeting on , 2006, at .m, local
time, at . At the special
meeting (and any adjournment or postponement of the meeting), holders of DeKalb
common stock will be asked to consider and vote upon a proposal to approve
the
merger agreement and a proposal to authorize the board of directors to adjourn
the special meeting to allow for time for further solicitation of proxies in
the
event there are insufficient votes present at the special meeting, in person
or
by proxy, to approve the merger agreement. Only holders of DeKalb common stock
of record at the close of business on , 2006, the record
date, will be entitled to receive notice of and to vote at the special meeting.
As of the record date, there were shares of DeKalb common stock outstanding
and
entitled to vote, with each such share entitled to one vote.
At
the
special meeting, DeKalb shareholders will be asked to approve the Agreement
and
Plan of Merger, dated as of January 19, 2006, by and between DeKalb and First
Community and to authorize the board of directors to adjourn the special meeting
to allow time for further solicitation of proxies in the event there are
insufficient votes present at the special meeting, in person or by proxy, to
approve the Agreement and Plan of Merger. Under the merger agreement, DeKalb
will merge with and into First Community and shares of DeKalb common stock
will
be converted into the right to receive $3.875 in cash and 0.60705 shares of
First Community common stock. DeKalb shareholders will also consider and vote
on
a proposal to authorize the board of directors to adjourn the special meeting
to
allow time for further solicitation of proxies in the event there are
insufficient votes present at the meeting, in person or by proxy, to approve
the
merger. Finally, DeKalb shareholders may also be asked to consider any other
business that properly comes before the special meeting. Each
copy
of this proxy statement/prospectus mailed to DeKalb shareholders is accompanied
by a proxy card for use at the special meeting.
Approval
of the merger proposal requires the affirmative vote of the holders of at least
two-thirds of the issued and outstanding shares entitled to vote at the DeKalb
special meeting. Approval of the proposal to authorize adjournment requires
that
the number of votes cast in favor of the proposal exceed the number of votes
cast against the proposal. On the record date, there were approximately
outstanding shares of DeKalb common stock, each of which is entitled to one
vote
at the special meeting. On that date, the directors and executive officers
of
DeKalb and their affiliates beneficially owned a total of approximately % of
the
outstanding shares of DeKalb common stock. Each of DeKalb’s directors and
executive officers has agreed, subject to several conditions, to vote his or
her
shares of DeKalb common stock in favor of the merger agreement. The presence,
in
person or by proxy, of shares of DeKalb common stock representing a majority
of
DeKalb outstanding shares entitled to vote at the special meeting is necessary
in order for there to be a quorum at the special meeting. A quorum must be
present in order for the vote on the merger agreement and vote on the
authorization to adjourn to occur. If there is no quorum present at the opening
of the meeting, the special meeting may be adjourned by the vote of a majority
of shares voting on the motion to adjourn.
Shares
of
common stock represented by properly executed proxies received at or prior
to
the DeKalb special meeting will be voted at the special meeting in the manner
specified by the holders of such shares. Properly executed proxies which do
not
contain voting instructions will be voted “FOR”
approval
of the merger agreement and the proposal to authorize adjournment.
Any
shareholder present in person or by proxy (including broker non-votes, which
generally occur when a broker who holds shares in street name for a customer
does not have the authority to vote on certain non-routine matters because
its
customer has not provided any voting instructions with respect to the matter)
at
the special meeting who abstains from voting will be counted for purposes of
determining whether a quorum exists.
Because
approval of the merger proposal requires the affirmative vote of the holders
of
at least two-thirds of all shares entitled to vote at the DeKalb special
meeting, abstentions and broker non-votes will have the same effect as negative
votes. Accordingly, the DeKalb board of directors urges its shareholders to
complete, date, and sign the accompanying proxy card and return it promptly
in
the enclosed, postage-paid envelope.
The
grant
of a proxy on the enclosed proxy card does not preclude you from voting in
person or otherwise revoking a proxy. There are three ways you can change your
vote. First, you may send a written notice to the person to whom you submitted
your proxy or to the secretary of DeKalb stating that you would like to revoke
your proxy. Second, you may complete and submit a later dated proxy with new
voting instructions. The latest vote actually received by DeKalb prior to the
special meeting will be your vote. Any earlier votes will be revoked. Third,
you
may attend the special meeting and vote in person. Any earlier votes will be
revoked. Simply attending the special meeting without voting, however, will
not
revoke your proxy. If you have instructed a broker to vote your shares, you
must
follow the directions you will receive from your broker to change or revoke
your
proxy.
First
Community and DeKalb will pay all of the costs of printing this proxy
statement/prospectus and of soliciting proxies in connection with the special
meeting. Solicitation of proxies may be made in person or by mail, telephone,
or
facsimile, or other form of communication by directors, officers, and employees
of DeKalb who will not be specially compensated for such solicitation. Nominees,
fiduciaries, and other custodians will be requested to forward solicitation
materials to beneficial owners and to secure their voting instructions, if
necessary, and will be reimbursed for the expenses incurred in sending proxy
materials to beneficial owners.
No
person
is authorized to give any information or to make any representation not
contained in this proxy statement/prospectus and, if given or made, such
information or representation should not be relied upon as having been
authorized by DeKalb, First Community, or any other person. The delivery of
this
proxy statement/prospectus does not, under any circumstances, create any
implication that there has been no change in the business or affairs of DeKalb
or First Community since the date of the proxy
statement/prospectus.
The
DeKalb board of directors has determined that the merger proposal and the
transactions contemplated thereby and the authorization to adjourn are in the
best interests of DeKalb and its shareholders. The members of the DeKalb board
of directors unanimously recommend that the DeKalb shareholders vote at the
special meeting to approve these proposals.
In
the
course of reaching its decision to approve the merger proposal and the
transactions contemplated thereby, the DeKalb board of directors, among other
things, consulted with its legal advisors, Haynsworth Sinkler Boyd, P.A.,
regarding the legal terms of the merger agreement and with its financial
advisor, The Orr Group, LLC, as to the fairness, from a financial point of
view,
of the consideration to be received by the holders of DeKalb common stock in
the
merger. For a discussion of the factors considered by the DeKalb board of
directors in
reaching
its conclusion, see “The Merger—DeKalb’s Reasons for the Merger” and “The
Merger—Opinion of DeKalb’s Financial Advisor.”
DeKalb
shareholders should note that DeKalb directors and officers have certain
interests in, and may derive benefits as a result of, the merger that are in
addition to their interests as shareholders of DeKalb. See “The Merger—Interests
of Directors and Officers of DeKalb that Differ from Your Interests.”
The
descriptions of the terms and conditions of the merger proposal, the merger
agreement, and any related documents in this proxy statement/prospectus are
qualified in their entirety by reference to the copy of the merger agreement
attached as Appendix A to this proxy statement/prospectus, to the registration
statement, of which this proxy statement/prospectus is a part, and to the
exhibits to the registration statement.
The
merger agreement provides for the merger of DeKalb with and into First
Community. First Community will be the surviving corporation in the merger.
Bank
of Camden, a wholly owned subsidiary of DeKalb, will merge with and into First
Community Bank, a wholly owned subsidiary of First Community. Each share of
DeKalb common stock issued and outstanding at the effective time of the merger
will be converted into the right to receive $3.875 in cash and 0.60705 shares
of
First Community common stock. Upon completion of the merger, William C.
Bochette, III, president and chief executive officer of DeKalb, will serve
as a
senior vice president of First Community Bank. In addition, First Community
will
appoint one current DeKalb director that is mutually acceptable to both parties
to the board of directors of First Community. First Community will also appoint
seven current DeKalb directors to an advisory board of First Community
Bank.
From
time
to time DeKalb’s chief executive officer has received casual expressions of
possible interest in combining forces or working together at some indeterminate
further time from senior officials of a number of financial institutions. In
October 2003, First Community’ chief executive officer, Mr. Crapps, contacted
Mr. Bochette, DeKalb’s new chief executive officer for a meeting at which they
discussed how First Community could provide assistance to DeKalb. In 2004,
management of DeKalb realized that the additional requirements being imposed
on
public companies pursuant to the Sarbanes-Oxley Act would significantly increase
the costs, both in management time and money, of operating a public company
and
that those costs would be difficult to bear for a company the size of DeKalb.
Management began to consider the options that could be available including
supporting efforts to secure regulatory relief for smaller companies, “going
private,” seeking a merger transaction or continuing to operate as an
independent community bank in the higher cost environment. Management concluded
that going private was not an attractive option and that it should explore
the
possibility of a merger transaction while supporting relief efforts and planning
to continue independent operations. In late 2004, DeKalb was contacted by an
out-of-area financial institution interested in exploring ways to enter the
greater Columbia area market and some very general discussions were
held.
In
early
2005, Mr. Bochette contacted Mr. Crapps and arranged a meeting with Mr. Crapps
on February 4, 2005. At that meeting Mr. Bochette and Mr. Crapps discussed
ways
in which First Community might provide assistance to DeKalb by buying loan
participations, extending credit, and otherwise. They also discussed, in general
terms, that First Community might have an interest in acquiring DeKalb in the
future.
In
March
2005, the SEC delayed the implementation of some of the more burdensome
Sarbanes-Oxley provisions but did not reduce the requirements. Mr. Bochette
realized that the costs would rise in the future and began to analyze what
DeKalb would need to do in order to produce the level of growth and earnings
to
be able to produce returns at the levels that were anticipated prior to the
enactment or Sarbanes-Oxley.
In
August
2005, Mr. Bochette met with representatives of a correspondent bank to discuss
DeKalb’s strategic planning issues, including peer group analysis, various
growth strategies, and projected earnings over a five-year period as well as
potential merger price premiums. Mr. Bochette considered that discussion in
conjunction with the difficulties of achieving rapid growth in a market that
was
growing slowly compared to the nearby Columbia market and of managing personnel
costs in the face of the availability of numerous well paid similar positions
in
the Columbia market. He reached the conclusion that a merger with another
institution already in the Columbia market would be more likely to produce
favorable results for DeKalb shareholders than would be likely if DeKalb
remained independent. Mr. Bochette then contacted another financial institution
that he believed might have an interest in acquiring DeKalb. Based on that
contact, Mr. Bochette concluded that the institution had some interest but
would
not be interested in a transaction with DeKalb in the near term.
In
September 2005, Mr. Bochette and the executive committee of DeKalb’s board of
directors met and reviewed the situation. The committee agreed that a merger
transaction with an appropriate merger partner might be in the best interest
of
DeKalb’s shareholders. Mr. Bochette advised the committee that he believed that
First Community would be a desirable merger partner due to its size, office
locations in the greater Columbia area, and the structure of its business if
it
would provide DeKalb shareholders with a reasonable merger premium. The
committee authorized Mr. Bochette to pursue discussions with First Community
and
to engage an investment adviser, The Orr Group LLC, to assist with negotiations
and the evaluation of alternatives.
Mr.
Bochette arranged a meeting with Mr. Crapps on October 4, 2005 to discuss
DeKalb’s interest in pursuing a transaction and, at that meeting, Mr. Bochette
and Mr. Crapps reviewed various elements of a possible transaction. On October
18, 2005, Mr. Crapps gave Mr. Bochette a preliminary outline of the terms of
a
possible transaction and expressed a desire to proceed with
discussions.
On
November 3, 2005, the DeKalb board of directors met with the financial adviser
and discussed First Community’s preliminary outline. The board voted to pursue
negotiations with First Community to determine whether an acceptable agreement
could be reached. Thereafter, Mr. Bochette and the investment adviser had
numerous contacts with Mr. Crapps regarding various elements of the proposed
transaction, especially the consideration to be received by DeKalb
shareholders.
On
November 29, 2005, First Community delivered a non-binding letter of intent
to
DeKalb describing the terms of a proposed transaction. The DeKalb board met
on
November 30, 2005 with its financial adviser and counsel to consider the letter
of intent. The financial adviser presented an analysis of the proposed
transaction and an analysis of the consideration that DeKalb shareholders might
receive in a similar transaction with a number of other companies that had
recently been active as acquirors or had publicly announced their interest
in
acquisitions and that the adviser believed might have an interest in DeKalb.
After considering the interests of DeKalb’s employees, the Camden community, and
DeKalb’s shareholders, the DeKalb board authorized Mr. Bochette to negotiate
changes to the letter of intent to provide for its immediate public disclosure
and to sign it on behalf of DeKalb.
After
further discussions with Mr. Crapps and revisions to the letter of intent,
it
was signed by both parties and disclosed to the public on December 8, 2005.
Shortly thereafter, the parties, with the assistance of counsel and, in the
case
of DeKalb, its financial adviser, negotiated the terms of a definitive agreement
and plan of merger for presentation to and approval of the parties’ respective
boards of directors. The negotiations revealed numerous areas of disagreement
and resulted in compromises by both sides to reach an agreement acceptable
to
both parties. During the course of the negotiations with First Community, DeKalb
was not contacted by any other institution to propose DeKalb’s being acquired by
the other institution.
The
DeKalb board of directors met on January 17, 2006 with counsel and its
investment adviser to review the obligations of directors when considering
a
merger of the company, the proposed terms of the agreement and plan of merger,
and an analysis of the fairness of the proposed transaction from a financial
point of view to the shareholders of DeKalb. The board of directors then voted
to approve the agreement and plan of merger and to recommend it to the
shareholders of DeKalb for their approval and authorized Mr. Bochette to execute
the agreement on behalf of DeKalb.
In
reaching its determination that the merger and the merger agreement and plan
of
merger are fair to, and in the best interest of, DeKalb and its shareholders,
DeKalb’s board of directors consulted with its advisers and counsel, as well as
with DeKalb’s management, and considered a number of factors, including, without
limitation, the following:
|
·
|
A
review of DeKalb’s current business, operations, earnings, and financial
condition and reasonable expectations of future performance and
operations;
|
·
The
terms
of the First Community’s offer, including both the amount and nature of the
consideration proposed to be paid in comparison to other similar transactions
occurring in the recent past within South Carolina;
|
·
|
The
recent market performance of First Community common stock, as well
as the
recent earnings performance and dividend payment history of First
Community;
|
|
·
|
The
belief of the DeKalb board of directors that the terms of the agreement
and plan of merger are attractive in that the agreement and plan
of merger
allow DeKalb’s shareholders to become shareholders in First Community and
receive a substantial cash payment;
|
|
·
|
The
difficulty of remaining independent in close proximity to the Columbia
market and risks of de novo branching into the Columbia market versus
the
benefits of combining with an institution with a significant Columbia
market presence;
|
|
·
|
The
alternatives to the merger, including remaining an independent
institution;
|
|
·
|
The
competitive and regulatory environment for financial institutions
generally;
|
|
·
|
The
wide range of banking products and services First Community offers
to its
customers;
|
|
·
|
The
impact of the proposed merger on DeKalb’s employees and the Camden
community;
|
|
·
|
The
belief of DeKalb’s board of directors, based upon analysis of the
anticipated financial effects of the merger, that upon consummation
of the
merger, First Community and its banking subsidiaries would remain
well-capitalized institutions, the financial positions of which would
be
in excess of all applicable regulatory capital
requirements;
|
|
·
|
The
Orr Group, LLC’s opinion that the consideration DeKalb shareholders will
receive as a result of the merger is fair from a financial point
of
view;
|
|
·
|
The
belief of DeKalb’s board of directors that, in light of the reasons
discussed above, First Community was an attractive choice as a long-term
affiliation partner of DeKalb; and
|
|
·
|
The
expectation that the merger will generally be a tax-free transaction
to
DeKalb shareholders with respect to the First Community common stock
received by virtue of the merger. See “Federal Income Tax
Consequences.”
|
DeKalb’s
board of directors did not assign any specific or relative weight to the
foregoing factors in their considerations
DeKalb
retained The Orr Group, LLC to render a written opinion to the board of
directors of DeKalb as to the fairness, from a financial point of view, of
the
consideration (the “Merger Consideration”) to be paid by First Community to the
shareholders of DeKalb as set forth in the Agreement and Plan of Merger (the
“Merger Agreement”) dated January 19, 2006 with DeKalb.
The
Orr
Group, LLC is an investment banking firm that specializes in providing
investment banking advisory services to financial institutions. The Orr Group,
LLC has been involved in numerous bank related mergers and acquisitions. No
limitations were imposed by DeKalb upon The Orr Group, LLC with respect to
rendering its opinion.
On
January 17, 2006, The Orr Group, LLC rendered its oral opinion to the board
of
directors of DeKalb, subsequently confirmed in writing, as to the fairness,
from
a financial point of view, of the Merger Consideration to
be
paid
by First Community to the shareholders of DeKalb. The Orr Group, LLC’s written
opinion is attached as Appendix C hereto and should be read in its entirety
with
respect to the procedures followed, assumptions made, matters considered and
qualifications and limitations on the review undertaken by The Orr Group, LLC
in
connection with its opinion. DeKalb’s shareholders are urged to read the opinion
in its entirety.
The
Orr
Group, LLC’s opinion to DeKalb’s board of directors is directed only to the
Merger Consideration as defined in the Merger Agreement dated January 19, 2006
as of this date and does not address the fairness, from a financial point of
view, of any change in the Merger Consideration that may be agreed upon by
DeKalb and First Community in the future. The Orr Group, LLC’s opinion does not
constitute a recommendation to any shareholder of DeKalb as to how such
shareholder should vote at the DeKalb special meeting.
In
arriving at its opinion, The Orr Group, LLC, among other things:
|
(i)
|
reviewed
the Merger Agreement and certain related
documents;
|
|
(ii)
|
reviewed
the historical and current financial position and
results of the operations of DeKalb and First Community;
|
|
(iii)
|
reviewed
certain publicly available information concerning First Community
including Annual Reports on Form 10-K for each of the years in
the three
year period ended December 31, 2004 and Quarterly Reports on Form
10-Q for
the periods ending March 31, 2005, June 30, 2005, and September
30,
2005;
|
|
(iv)
|
reviewed
certain publicly available information concerning DeKalb including
Annual
Reports on Form 10-K for each of the years in the three year period
ended
December 31, 2004 and Quarterly Reports on Form 10-Q for the periods
ending March 31, 2005, June 30, 2005, and September 30, 2005;
|
|
(v)
|
reviewed
certain available financial forecasts concerning the business and
operations of DeKalb that were prepared by management of
DeKalb;
|
|
(vi)
|
participated
in discussions with certain officers and employees of DeKalb and
First
Community to discuss the past and current business operations,
financial
condition and prospects of DeKalb and First Community, as well
as matters
we believed relevant to our
inquiry;
|
|
(vii)
|
reviewed
certain publicly available operating and financial information
with
respect to other companies that we believe to be comparable in
certain
respects to DeKalb and First
Community;
|
|
(viii)
|
reviewed
the current and historical relationships between the trading levels
of
First Community's common stock and the historical and current market
for
the common stock of First Community and other companies that we
believe to
be comparable in certain respects to First Community;
|
|
(ix)
|
reviewed
the nature and terms of certain other acquisition transactions
that we
believe to be relevant; and
|
(x)
performed
such other reviews and analyses we have deemed appropriate
Within
its review and analysis, The Orr Group, LLC assumed and relied upon the accuracy
and completeness of all of the financial and other information provided to
The
Orr Group, LLC, or that was publicly available, and did not attempt
independently to verify nor assumed responsibility for verifying any such
information. With respect to the financial projections, The Orr Group, LLC
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of DeKalb or First Community, as
the
case may be, and The Orr Group, LLC expresses no opinion with respect to such
forecasts or the assumptions on which they are based. The Orr Group, LLC has
not
made or obtained, or assumed any responsibility for making or obtaining, any
independent evaluations or appraisals of any of the assets, including properties
and facilities, or liabilities of DeKalb or First Community.
The
Orr
Group, LLC employed a variety of analyses, of which some are briefly summarized
below. The analyses outlined below do not represent a complete description
of
the analyses performed by The Orr Group, LLC. The Orr Group, LLC believes that
it is necessary to consider all analyses as a whole and that relying on a select
number of the analyses, without considering the whole, could create a
misunderstanding of the opinion derived from them. In addition, The Orr Group,
LLC may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis should not be taken to be The Orr Group, LLC’s view of the entire
analysis as a whole.
Selected
Companies Analysis - First Community
The
Orr
Group, LLC compared the financial performance data of First Community with
a
peer group of 25 publicly traded North Carolina and South Carolina banks that
had total assets of greater than $300 million and less than $600 million. The
peer group included the following:
Peer
Group List
|
|
American
Community Bancshares, Inc.
|
ACBA
|
First
Reliance Bancshares, Inc.
|
FSRL
|
|
|
|
|
Bank
of the Carolinas
|
BCAR
|
First
South Bancorp, Inc.
|
FSBS
|
|
|
|
|
Bank
of Wilmington Corporation
|
BKWW
|
Four
Oaks Fincorp, Inc.
|
FOFN
|
|
|
|
|
Beach
First National Bancshares, Inc.
|
BFNB
|
Greenville
First Bancshares, Inc.
|
GVBK
|
|
|
|
|
BNC
Bancorp
|
BNCN
|
HCSB
Financial Corporation
|
HCFB
|
|
|
|
|
Carolina
Bank Holdings, Inc.
|
CLBH
|
MidCarolina
Financial Corporation
|
MCFI
|
|
|
|
|
Community
Bankshares, Inc.
|
SCB
|
New
Century Bancorp, Inc.
|
NCBC
|
|
|
|
|
Community
Capital Corp.
|
CYL
|
North
State Bancorp
|
NSBC
|
|
|
|
|
Community
First Bancorporation
|
CFOK
|
Peoples
Bancorporation, Inc.
|
PBCE
|
|
|
|
|
Crescent
Financial Corporation
|
CRFN
|
Southcoast
Financial Corporation
|
SOCB
|
|
|
|
|
ECB
Bancorp, Inc.
|
ECBE
|
Union
Financial Bancshares, Incorporated
|
UFBS
|
|
|
|
|
First
National Bancshares, Inc.
|
FNSC
|
Uwharrie
Capital Corp
|
UWHR
|
|
|
|
|
|
|
Waccamaw
Bankshares, Inc.
|
WBNK
|
The
results of the analysis involve complex considerations of the selected companies
and First Community. The Orr Group, LLC compared performance indicators of
First
Community with the median, upper and lower quartile performance indicators
of
the selected peer group. The performance indicators utilized by The Orr Group,
LLC based on financial information reported as of September 30, 2005. An
overview comparison of the indicators included the following:
|
|
FCCO
|
|
Peer
Data
|
|
|
|
Data
|
|
Upper
Quart
|
|
Median
|
|
Lower
Quart
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
($000s)
|
|
$
|
463,534
|
|
$
|
466,729
|
|
$
|
372,778
|
|
$
|
328,338
|
|
Deposits
($000s)
|
|
$
|
335,836
|
|
$
|
360,221
|
|
$
|
296,126
|
|
$
|
263,982
|
|
Tangible
Equity ($000s)
|
|
$
|
23,705
|
|
$
|
35,347
|
|
$
|
28,934
|
|
$
|
24,110
|
|
Loans/Deposits
|
|
|
62.8
|
|
|
99.8
|
|
|
95.9
|
|
|
91.6
|
|
Loans/Assets
|
|
|
45.5
|
|
|
80.3
|
|
|
78.2
|
|
|
74.3
|
|
Deposits/Assets
|
|
|
72.5
|
|
|
83.0
|
|
|
81.0
|
|
|
77.9
|
|
Core
Deposits
|
|
|
83.3
|
|
|
78.4
|
|
|
72.9
|
|
|
64.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
& Capital Adequacy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCI
Ratio
|
|
|
5.4
|
|
|
8.7
|
|
|
7.7
|
|
|
6.3
|
|
Tier
1 Ratio
|
|
|
13.9
|
|
|
3.4
|
|
|
11.4
|
|
|
10.5
|
|
Reserves/Loans
|
|
|
1.3
|
|
|
1.4
|
|
|
1.3
|
|
|
1.2
|
|
NPAs/Assets
|
|
|
0.2
|
|
|
0.6
|
|
|
0.4
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIM(MRQ)
|
|
|
3.4
|
|
|
4.2
|
|
|
3.9
|
|
|
3.5
|
|
Effic
Ratio(MRQ)
|
|
|
67.0
|
|
|
63.1
|
|
|
59.0
|
|
|
52.6
|
|
NIM
|
|
|
3.4
|
|
|
4.1
|
|
|
3.9
|
|
|
3.5
|
|
Effic
Ratio
|
|
|
67.3
|
|
|
64.3
|
|
|
60.7
|
|
|
56.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROAA(MRQ)
|
|
|
0.7
|
|
|
1.1
|
|
|
0.9
|
|
|
0.7
|
|
ROAE(MRQ)
|
|
|
5.9
|
|
|
14.0
|
|
|
11.7
|
|
|
9.3
|
|
ROAA
|
|
|
0.7
|
|
|
1.0
|
|
|
0.8
|
|
|
0.7
|
|
ROAE
|
|
|
6.1
|
|
|
12.9
|
|
|
10.3
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P/E(MRQ)
|
|
|
19.1
|
|
|
23.8
|
|
|
18.9
|
|
|
16.6
|
|
P/E
|
|
|
18.6
|
|
|
24.9
|
|
|
21.4
|
|
|
18.5
|
|
P/TB
|
|
|
2.29
|
|
|
2.42
|
|
|
1.96
|
|
|
1.77
|
|
P/E
(Core)(MRQ)
|
|
|
19.1
|
|
|
23.7
|
|
|
18.9
|
|
|
16.2
|
|
P/E
(Core)
|
|
|
19.4
|
|
|
24.9
|
|
|
21.0
|
|
|
17.6
|
|
Comparable
Transaction Analysis
The
Orr
Group, LLC reviewed data of selected transactions involving pending and
completed bank acquisitions that it deemed pertinent to an analysis of the
Merger. The transactions selected were mergers that were announced after June
30, 2003 and where the selling bank had assets between $40 million and $100
million, ROAA’s less than 0.75%, and TCE ratios greater than 7.50% and less than
12.50%. From these transactions, The Orr Group formulated a list of nationwide
mergers, 18 total transactions, and a list of regional (South Carolina, North
Carolina, Georgia, Kentucky, Tennessee and Virginia) mergers, 14 total
transactions.
The
Orr
Group, LLC compared the median, upper quartile and lower quartile pricing ratios
of the comparable transactions to the pricing ratios of the Merger. The pricing
ratios included price to tangible book, price to earnings per share for the
latest twelve months, price to assets, price to deposits and the franchise
premium to core deposit ratio.
A
summary
of the nationwide merger analysis is included in the following
table:
|
|
Price
to
|
|
Price
to
|
|
Price
to
|
|
Price
to
|
|
Price
to
|
|
Nationwide
Transactions
|
|
TBVPS
|
|
LTM
EPS
|
|
Assets
|
|
Deposits
|
|
to
Core Dep
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dekalb
Transaction Statistics
|
|
|
1.8
|
|
|
73.7
|
|
|
21.3
|
|
|
32.5
|
|
|
29.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Median
Multiple
|
|
|
1.7
|
|
|
27.5
|
|
|
17.1
|
|
|
18.9
|
|
|
10.7
|
|
Upper
Quartile
|
|
|
2.2
|
|
|
37.4
|
|
|
20.1
|
|
|
22.7
|
|
|
14.2
|
|
Lower
Quartile
|
|
|
1.6
|
|
|
21.9
|
|
|
14.6
|
|
|
16.7
|
|
|
8.6
|
|
A
summary
of the regional merger analysis is included in the following
table:
|
|
Price
to
|
|
Price
to
|
|
Price
to
|
|
Price
to
|
|
Fran
Prem
|
|
Regional
Transactions
|
|
TBVPS
|
|
LTM
EPS
|
|
Assets
|
|
Deposits
|
|
to
Core Dep
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dekalb
Transaction Statistics
|
|
|
1.8
|
|
|
73.7
|
|
|
21.3
|
|
|
32.5
|
|
|
29.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Median
Multiple
|
|
|
2.0
|
|
|
18.5
|
|
|
18.7
|
|
|
21.5
|
|
|
13.7
|
|
Upper
Quartile
|
|
|
2.1
|
|
|
23.3
|
|
|
21.7
|
|
|
26.2
|
|
|
17.0
|
|
Lower
Quartile
|
|
|
1.8
|
|
|
16.5
|
|
|
14.3
|
|
|
15.5
|
|
|
12.7
|
|
Discount
Dividend Analysis
The
Orr
Group, LLC performed a discount dividend analysis to estimate a range of present
values per share of DeKalb’s common stock as a stand-alone entity. The Orr
Group, LLC discounted five years of estimated cash flows for DeKalb based on
projected growth rates and capital requirements. The Orr Group, LLC derived
a
range of terminal values by applying multiples ranging from 21 times to 33
times
estimated trailing net income for the terminal year 2010. The present value
of
the estimated excess cash flows and terminal value was calculated using discount
rates ranging from 10% to 14%, which The Orr Group, LLC viewed as the
appropriate range of discount rates for a company with DeKalb’s risk
characteristics. The analysis yielded a range of stand-alone, fully diluted
values for DeKalb’s stock of approximately $10.00 to $18.75. The Orr Group, LLC
included the discount dividend analysis because it is a widely used valuation
methodology; however the results of such methodology are highly dependent upon
numerous assumptions.
Contribution
Analysis
In
its
contribution analysis, The Orr Group, LLC compared the pro forma financial
contribution of DeKalb to the combined company to the pro forma ownership (as
if
completed through a 100% stock transaction) of DeKalb shareholders in the
combined company’s shareholder base. The contribution analysis also took into
account cost savings and core deposit intangible amortization expenses as a
result of the merger. The contribution analysis revealed that DeKalb would
contribute 10.4% of the assets, 7.6% of income statement items, 7.2% projected
income items and 15.4% projected income items adjusted for synergies and core
deposit intangible amortization expenses. The average of all of the financial
items considered was 7.9%. This was compared to the pro forma fully diluted
ownership for DeKalb shareholders of 14.6% (as if 100% of First Community’s
stock were used in consideration of the transaction) in the combined company.
The pro forma fully diluted ownership for DeKalb shareholders based on the
actual transaction structure was 11.5%, based a 25% cash level.
Pro
Forma Merger Analysis
The
Orr
Group, LLC analyzed the financial impact of the merger on the estimated earnings
per share for First Community. Based on the various assumptions made to
determine the pro forma numbers and the
consideration
paid by First Community, the merger would be dilutive to GAAP earnings and
accretive to cash earnings in 2006 and accretive to GAAP and cash earnings
per
share in 2007.
No
company or transaction used in the above analyses as a comparison is identical
to DeKalb, First Community or the Merger. Accordingly, an analysis of the
results of the foregoing involves complex considerations and judgments
concerning differences in financial growth and operating characteristics of
the
companies and other factors that could affect the public trading value of the
companies to which they are being compared. Mathematical analysis in and of
itself does not necessarily provide meaningful comparisons.
The
Orr
Group, LLC has been paid a fee of $24,470 to date and will be paid an additional
fee of $73,411 at the time the merger is consummated. The payment to The Orr
Group, LLC includes payment for services rendered in preparation and delivery
of
the fairness opinion. DeKalb has agreed to reimburse legal and other reasonable
expenses and to indemnify The Orr Group, LLC and its affiliates, directors,
agents, employees and controlling persons in connection with certain matters
related to rendering its opinion, including liabilities under securities
laws.
THE
WRITTEN OPINION OF THE ORR GROUP, LLC TO DEKALB IS ATTACHED AS APPENDIX C TO
THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THE
DESCRIPTION OF THE DEKALB FAIRNESS OPINION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO APPENDIX C. DEKALB SHAREHOLDERS ARE URGED TO READ THE OPINION
IN
ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE,
MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN
BY THE ORR GROUP, LLC IN CONNECTION WITH RENDERING ITS OPINION.
Each
share of DeKalb common stock issued and outstanding at the effective time of
the
merger will be converted into the right to receive $3.875 in cash and 0.60705
shares of First Community common stock. The aggregate amount of cash and First
Community shares of common stock received by DeKalb shareholders will be a
function of the number of shares of DeKalb common stock issued and outstanding
at the effective time of the merger. DeKalb had shares of common stock issued
and outstanding as of , 2006. 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 , First Community
will issue an aggregate of shares of stock and $ in cash.
No
assurance can be given that the current fair market value of First Community
common stock will be equivalent to the fair market value of First Community
common stock on the date that stock is received by a DeKalb shareholder or
at
any other time. The fair market value of First Community common stock received
by a DeKalb shareholder may be greater or less than the current fair market
value of First Community due to numerous market factors.
No
fractional shares of First Community common stock will be issued to any holder
of DeKalb common stock in the merger. For each fractional share that would
otherwise be issued, First Community will pay cash in an amount equal to the
fraction multiplied by a value that was derived from the average closing sales
price for First Community common stock for a 20-day trading period ending on
the
fifth calendar day immediately prior to the effective time. No interest will
be
paid or accrued on cash payable in lieu of fractional shares.
Each
outstanding DeKalb stock option will be converted into an option to purchase
0.8094 shares of First Community common stock. The per share exercise price
under each option will be adjusted by dividing the per share exercise price
by
0.8094. All outstanding options will be exercisable for the same period and
will
otherwise have the same terms and conditions applicable to the DeKalb options
that they replace.
As
soon
as reasonably practicable after the effective time of the merger, First
Community will mail appropriate transmittal materials to each record holder
of
DeKalb common stock for use in effecting the surrender and cancellation of
those
certificates in exchange for First Community common stock. Risk of loss and
title to the certificates will remain with the holder until proper delivery
of
such certificates to First Community by former DeKalb shareholders. DeKalb
shareholders should not surrender their certificates for exchange until they
receive a letter of transmittal and instructions from First
Community.
After
the effective time of the merger, each holder of shares of DeKalb common stock,
except holders exercising dissenters’ rights of appraisal, issued and
outstanding at the effective time must surrender the certificate or certificates
representing their shares to First Community and will, as soon as reasonably
practicable after surrender, receive the consideration they are entitled to
under the merger agreement, together with all undelivered dividends or
distributions in respect of such shares (without interest). First Community
will
not be obligated to deliver the consideration to which any former holder of
DeKalb common stock is entitled until the holder surrenders the certificate
or
certificates representing his or her shares for exchange. The certificate or
certificates so surrendered must be duly endorsed as First Community may
require. First Community will not be liable to a holder of DeKalb common stock
for any property delivered in good faith to a public official pursuant to any
applicable abandoned property law.
After
the
effective time of the merger (and prior to the surrender of certificates of
DeKalb common stock to First Community), record holders of certificates that
represented outstanding DeKalb common stock immediately prior to the effective
time of the merger will have no rights with respect to the certificates other
than the right to surrender the certificates and receive in exchange for the
certificates a certificate or certificates representing the aggregate number
of
whole shares of First Community common stock to which the holder is entitled
pursuant to the merger agreement.
In
the
event that any dividend or distribution, the record date for which is on or
after the effective time of the merger, is declared by First Community on First
Community common stock, no such dividend or other distributions will be
delivered to the holder of a certificate representing shares of DeKalb common
stock immediately prior to the effective time of the merger until such holder
surrenders such certificate as set forth above.
In
addition, holders of certificates that represented outstanding DeKalb common
stock immediately prior to the effective time of the merger will be entitled
to
vote after the effective time of the merger at any meeting of First Community
shareholders the number of whole shares of First Community common stock into
which such shares have been converted, even if such holder has not surrendered
such certificates for exchange as set forth above.
First
Community shareholders will not be required to exchange certificates
representing their shares of First Community common stock or otherwise take
any
action after the merger is completed.
The
following summarizes certain material federal income tax consequences of the
merger to DeKalb shareholders. This summary is based on current laws,
regulations, rulings, and decisions now in effect, all of which are subject
to
change at any time, possibly with retroactive effect. This summary is not a
complete description of all of the tax consequences of the merger and, in
particular, may not address federal income tax consequences applicable to you
if
you are subject to special treatment under federal income tax law, such as
rules
relating to shareholders who are not citizens or residents of the United States,
who are financial institutions, foreign corporations, tax-exempt organizations,
insurance companies, or dealers in securities, shareholders who acquired their
shares pursuant to the exercise of options or similar derivative securities
or
otherwise as compensation, and shareholders who hold their shares as part of
a
straddle or conversion transaction. In addition, this summary does not address
the tax consequences of the merger under applicable state, local, foreign,
or
estate tax laws. This discussion assumes you hold your shares of DeKalb common
stock as a capital asset within the meaning of Section 1221 of the Internal
Revenue Code of 1986. Each DeKalb shareholder should consult with his or her
own
tax advisor about the tax consequences of the merger in light of his or her
individual circumstances, including the application of any federal, state,
local, foreign, or estate tax law.
The
merger is intended to constitute a “reorganization” under Section 368(a) of the
Internal Revenue Code. On the closing date, First Community and DeKalb will
receive an opinion from Nelson Mullins Riley & Scarborough LLP, counsel to
First Community, that the merger will qualify as a reorganization. The closing
date opinion will be based on customary assumptions and customary
representations made by DeKalb and First Community. An opinion of counsel
represents the counsel’s best legal judgment and is not binding on the Internal
Revenue Service or any court. If, notwithstanding the opinion of counsel, the
merger does not qualify as a reorganization, the exchange of DeKalb common
stock
for First Community common stock in the merger will be a taxable transaction.
Provided
the merger qualifies as a reorganization, neither DeKalb nor First Community
will recognize any gain or loss for federal income tax purposes, and the federal
income tax consequences to you as a DeKalb shareholder will be as follows:
Exchange
for First Community Common Stock and Cash.
You will
generally recognize gain (but not loss) in an amount equal to the lesser of
(1)
the amount of gain realized (i.e., the excess of the sum of the amount of cash
and the fair market value of the First Community common stock received pursuant
to the merger over your adjusted tax basis in your shares of DeKalb common
stock
surrendered) and (2) the amount of cash received pursuant to the merger. For
this purpose, gain or loss must be calculated separately for each identifiable
block of shares surrendered in the exchange, and a loss realized on one block
of
shares may not be used to offset a gain realized on another block of shares.
Any
recognized gain will generally be long-term capital gain if your holding period
with respect to the DeKalb common stock surrendered is more than one year.
If,
however, the cash received has the effect of the distribution of a dividend,
the
gain would be treated as a dividend to the extent of your ratable share of
accumulated earnings and profits as calculated for United States federal income
tax purposes. See " -- Possible Treatment of Cash as a Dividend."
Your
aggregate tax basis of the First Community common stock you receive in exchange
for your shares of DeKalb common stock will be equal to the aggregate adjusted
tax basis of the shares of DeKalb common stock surrendered for First Community
common stock and cash, reduced by the amount of cash you receive pursuant to
the
merger, and increased by the amount of gain (including any portion of the gain
that is treated as a dividend as described below), if any, you must recognize
on
the exchange. Your holding period of the First Community common stock will
include the holding period of the shares of DeKalb common stock you surrendered.
If you have differing bases or holding periods in respect of your shares of
DeKalb common stock, you should consult your own tax advisor prior to the
exchange with regard to identifying the bases or holding periods of the
particular shares of First Community common stock received in the exchange.
Possible
Treatment of Cash as a Dividend.
In
general, the determination of whether the gain recognized in the exchange will
be treated as capital gain or has the effect of a distribution of a dividend
depends upon whether and to what extent the exchange reduces your deemed
percentage stock ownership of First Community. For purposes of this
determination, you are treated as if you first exchanged all of your shares
of
DeKalb common stock solely for First Community common stock and then First
Community immediately redeemed (the "deemed redemption") a portion of the First
Community common stock in exchange for the cash you actually received. The
gain
recognized in the exchange followed by a deemed redemption will be treated
as
capital gain if the deemed redemption is (1) "substantially disproportionate"
with respect to the holder or (2) "not essentially equivalent to a
dividend."
The
deemed redemption, generally, will be "substantially disproportionate" with
respect to you if the percentage described in (2) below is less than 80 percent
of the percentage described in (1) below. Whether the deemed redemption is
"not
essentially equivalent to a dividend" with respect to you will depend upon
your
particular circumstances. At a minimum, however, in order for the deemed
redemption to be "not essentially equivalent to a dividend," the deemed
redemption must result in a "meaningful reduction" in your deemed percentage
stock ownership of First Community. In general, that determination requires
a
comparison of (1) the percentage of the outstanding stock of First Community
that you are deemed actually and constructively to have owned immediately before
the deemed redemption and (2) the percentage of the outstanding stock of First
Community that is actually and constructively owned by you immediately after
the
deemed redemption. In applying the above tests, you may, under the constructive
ownership rules, be deemed to own stock that is owned by other persons or
otherwise in addition to the stock actually owned by you. As these rules are
complex, each DeKalb shareholder that may be
subject
to these rules should consult its own tax advisor. The IRS has ruled that a
minority shareholder in a publicly held corporation whose relative stock
interest is minimal and who exercises no control with respect to corporate
affairs is considered to have a "meaningful reduction" if that shareholder
has a
relatively minor reduction in its percentage stock ownership under the above
analysis.
Cash
Received in Lieu of a Fractional Share.
Cash you
receive in lieu of a fractional share of First Community common stock generally
will be treated as received in redemption of the fractional share, and gain
or
loss generally will be recognized based on the difference between the amount
of
cash received in lieu of the fractional share and the portion of your aggregate
adjusted tax basis of the shares of DeKalb common stock surrendered allocable
to
the fractional share. Such gain or loss generally will be long-term capital
gain
or loss if the holding period for such shares of DeKalb common stock is more
than one year.
Each
DeKalb shareholder is urged to consult his or her personal tax and financial
advisor as to his or her specific federal income tax consequences, based on
his
or her own particular status and circumstances, and also as to any state, local,
foreign, estate, or other tax consequences arising out of the
merger.
General.
Some
of
the employees and directors of DeKalb may be deemed to have interests in the
merger in addition to their interests as shareholders of DeKalb generally.
These
interests include, among others, proposed employee benefits for those who become
employees of First Community or First Community Bank after the merger, an
employment agreement between First Community, DeKalb, Bank of Camden, and
William C. Bochette, III, the appointment of one current DeKalb director to
the
board of directors of First Community, and the appointment of seven current
DeKalb directors to an advisory board of First Community Bank and the commitment
to pay advisory fees to these individuals for these services, and insurance
coverage for DeKalb’s directors and officers, as described below.
Employee
Benefits.
The
merger agreement generally provides that First Community will furnish to those
employees of DeKalb who become employees of First Community or First Community
Bank after the effective time of the merger benefits under employee benefit
plans which, when taken as a whole, are substantially similar to those currently
provided by First Community and its subsidiaries to their similarly situated
employees. For purposes of participation, vesting, and benefit accrual under
First Community’s employee benefit plans, service with DeKalb prior to the
effective time of the merger will be treated as service with First Community
or
its subsidiary.
Bochette
Employment Agreement. DeKalb
and its president and chief executive officer, William C. Bochette, III, are
currently bound by an employment agreement. In exchange for a
lump
sum payment in an amount equal to (i) the lesser of $400,000, or (ii) 2.99
times
his “base amount,” as such term is defined for purposes of Section 280G of the
Internal Revenue Code of 1986,
Mr.
Bochette has agreed to terminate this agreement and to enter into a new
employment agreement with First Community Bank.
Pursuant
to the new employment agreement, Mr. Bochette will serve as a senior vice
president of First Community Bank. The new agreement commences upon the
consummation of the merger and will be for a term of three years. At
the
end of this initial term, the agreement will automatically
extend for additional one year terms unless First Community Bank gives written
notice to Mr. Bochette at least 12 months prior to the end of the then current
term. During
his employment and for a period of 12 months following termination, Mr. Bochette
will be prohibited from serving
as an organizer, director or officer of, or consultant to, or acquiring or
maintaining more than a 1% passive investment in, another depository financial
institution or holding company if such institution has an office located within
a radius of 10 miles from (i) the main office of First Community Bank or (ii)
any branch office of First Community Bank. He will also be prohibited from
soliciting employees and customer for a period of 12 months following
termination (24
months if his employment terminates after the third anniversary of the
employment agreement). Mr.
Bochette will receive an annual base salary of $150,000, an automobile, country
and dinner club dues, and other employee benefits currently in effect
for similarly situated employees.
Directors.
As soon
as practicable following the effective time of the merger, First Community
will
appoint one present director of DeKalb, other than Mr. Bochette, mutually
acceptable to the both parties to the First
Community
board of directors. In addition, First Community will appoint seven current
DeKalb directors to an advisory board of First Community Bank and pay advisory
fees to these individuals for these services.
Support
Agreements. In
connection with the execution of the merger agreement, the officers and
directors of DeKalb entered into support agreements in their capacity as
shareholders in which they agreed not to sell or otherwise dispose of or
encumber (other than in connection with an ordinary bank loan) their shares
of
DeKalb common stock without the prior approval of First Community. They also
agreed to vote all of the shares of DeKalb common stock for which they have
sole
voting authority, and to use their best efforts to cause to be voted all of
the
shares of DeKalb common stock for which they have shared voting authority,
for
the approval of the merger and against any acquisition proposal (as defined
in
the merger agreement).
Insurance.
First
Community has agreed to indemnify and hold harmless each director and officer
of
DeKalb for a period of three years from liability and expenses arising out
of
matters existing or occurring at or before the consummation of the merger.
First
Community has also agreed that it will maintain a policy of directors' and
officers' liability insurance coverage for the benefit of DeKalb’s directors and
officers who are currently covered by insurance for three years following
consummation of the merger, or such lesser period of time as can be purchased
for an aggregate amount equal to three times the current annual
premium.
The
obligations of DeKalb and First Community to consummate the merger are subject
to the satisfaction or waiver (to the extent permitted) of several conditions,
including:
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Holders
of two-thirds of the outstanding shares of DeKalb must have approved
the
merger proposal;
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The
required regulatory approvals described under “The Merger—Regulatory
Approvals” must have been received, generally without any conditions or
requirements which would, in the reasonable judgment of the board
of
directors of First Community, materially adversely affect the economic
or
business benefits of the transactions contemplated by the merger
agreement
so as to render inadvisable the consummation of the
merger;
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Each
party must have received all consents (other than those described
in the
preceding paragraph) required for consummation of the merger and
for the
prevention of a default under any contract of such party which, if
not
obtained or made, would reasonably likely have, individually or in
the
aggregate, a material adverse effect on such party, generally without
any
conditions or requirements which would, in the reasonable judgment
of the
board of directors of First Community, materially adversely affect
the
economic or business benefits of the transactions contemplated by
the
merger agreement so as to render inadvisable the consummation of
the
merger;
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No
court or regulatory authority may have taken any action which prohibits,
restricts, or makes illegal the consummation of the transactions
contemplated by the merger
agreement;
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The
registration statement registering the shares of First Community
common
stock to be received by DeKalb shareholders, of which this proxy
statement/prospectus is a part, must have been declared effective
by the
SEC, no stop order suspending the effectiveness of the registration
statement may have been issued, no action, suit, proceeding, or
investigation by the SEC to suspend the effectiveness of the registration
statement may have been initiated and be continuing, and all necessary
approvals under federal and state securities laws relating to the
issuance
or trading of the shares of First Community common stock issuable
pursuant
to the merger must have been
received;
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William
C. Bochette, III must have entered into an employment agreement with
First
Community and must have terminated his existing employment agreement,
and
each director of DeKalb must have executed a shareholder support
agreement;
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The
other
party’s representations and warranties must remain accurate, and the other party
must have performed all of the agreements and covenants to be performed by
it
pursuant to the merger agreement, and must have delivered certificates
confirming satisfaction of the foregoing requirements and certain other matters;
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First
Community must have received from each “affiliate” of DeKalb an agreement
stating, among other things, that he or she will comply with federal
securities laws when transferring any shares of First Community common
stock received in the merger (see “The Merger—Resales of First Community
Common Stock”);
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DeKalb
shall have not received notice from its shareholders of their intent
to
exercise their statutory right to dissent with respect to more than
10% of
the outstanding shares of DeKalb common
stock;
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DeKalb’s
net shareholders’ equity at the effective time of the merger shall not be
more than $100,000 less than the amount reported in DeKalb’s November 2005
month-end financial report, but excluding (i) the effects of reasonable
fees and expenses incurred by DeKalb in connection with the merger
or (ii)
accumulated other comprehensive income;
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DeKalb
and First Community must maintain Bank of Camden’s allowance for loan
losses at 1.00% of the bank’s total outstanding loans;
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No
material adverse effect shall have occurred with respect to DeKalb
or
First Community from their September 30, 2005 balance sheets to the
effective time of the merger; and
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Each
party must have received an opinion from Nelson Mullins Riley &
Scarborough, LLP to the effect that the merger will be treated for
federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue
Code.
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No
assurances can be provided as to when or if all of the conditions precedent
to
the merger can or will be satisfied or waived by the appropriate party. As
of
the date of this proxy statement/prospectus, the parties know of no reason
to
believe that any of the conditions set forth above will not be satisfied.
The
conditions to consummation of the merger may be waived, in whole or in part,
to
the extent permissible under applicable law, by the party for whose benefit
the
condition has been imposed, without the approval of such party’s shareholders.
DeKalb
and First Community have agreed to use their reasonable best efforts to obtain
all regulatory approvals required to consummate the transactions contemplated
by
the merger agreement, which include approval from the South Carolina State
Board
of Financial Institutions and the Office of the Comptroller of the Currency.
In
addition, First Community is required to deliver a notice filing to the Federal
Reserve Bank of Richmond. First Community filed these applications in March
2006. The merger cannot proceed in the absence of these regulatory approvals.
Although DeKalb and First Community expect to obtain these required regulatory
approvals, there can be no assurance as to if and when these regulatory
approvals will be obtained.
Other
than as summarized above, we are not aware of any governmental approvals or
actions that may be required for consummation of the merger. Should any other
approval or action be required, we currently contemplate that we would seek
such
approval or action. To the extent that the above summary describes statutes
and
regulations, it is qualified in its entirety by reference to those particular
statutes and regulations.
First
Community and DeKalb have made certain customary representations and warranties
to each other in the merger agreement. For information on these representations
and warranties, please refer to the merger
agreement
attached as Appendix A. If either party materially violates any of its
representations or warranties and fails to cure such violation, the other party
may terminate the merger agreement.
Notwithstanding
the approval of the merger proposal by DeKalb shareholders, DeKalb and First
Community can mutually agree at any time to terminate the merger agreement
before completing the merger.
Either
DeKalb or First Community can also terminate the merger agreement:
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If
the other party materially violates any of its representations or
warranties under the merger agreement and fails to cure the
violation;
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If
required regulatory approval is denied by final nonappealable action
of
such regulatory authority or if any action taken by such authority
is not
appealed within the time limit for
appeal;
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If
any law or order permanently restraining, enjoining, or otherwise
prohibiting the consummation of the merger shall have become final
and
nonappealable;
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If
DeKalb shareholder approval is not obtained at the special meeting;
or
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If
we do not complete the merger by October 31,
2006.
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First
Community can also terminate the merger agreement, provided that it is not
in
material breach of any representation, warranty, or covenant, or other agreement
in the merger agreement, and the DeKalb shareholders have not approved the
merger:
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If
the DeKalb board of directors fails to reaffirm its approval upon
First
Community’s request for such reaffirmation of the merger or if the DeKalb
board of directors resolves not to reaffirm the
merger;
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If
the DeKalb board of directors withdraws, qualifies, modifies, or
proposes
publicly to withdraw, qualify, or modify, in a manner adverse to
First
Community, its recommendation that the shareholders approve the
merger;
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If
the DeKalb board of directors affirms, recommends, or authorizes
entering
into any acquisition transaction other than the merger or, within
five
business days after commencement of any tender or exchange offer
for any
shares of its common stock, the DeKalb board of directors makes any
recommendation other than against such tender or exchange offer;
or
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If
the DeKalb board of directors negotiates or authorizes the conduct
of
negotiations (and five business days have elapsed without such
negotiations being discontinued) with a third party regarding an
acquisition proposal other than the
merger.
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First
Community may also terminate the merger agreement if at any time during the
three business day period commencing on the Determination Date (as defined
in
the merger agreement) the final FCCO Stock Price (as defined in the merger
agreement) is greater than $22.98. Within three business days of receiving
First
Community’s notice of termination, DeKalb will have the option of decreasing the
per share purchase price to be received by DeKalb shareholders so that it would
equal $22.98.
DeKalb
can terminate the merger agreement, provided that it is not in material breach
of any representation, warranty, or covenant, or other agreement in the merger
agreement, if, prior to the adoption of the merger agreement by the shareholders
at the special meeting, the DeKalb board of directors has (x) withdrawn or
modified or changed its recommendation or approval of the merger agreement
in a
manner adverse to First Community in order to approve and permit DeKalb to
accept a superior proposal and (y) determined, after
consultation
with and the receipt
of
advice from outside legal counsel to DeKalb, that the failure to take such
action would be likely to result in a breach of the board of directors’
fiduciary duties under applicable law.
DeKalb
may also terminate the Agreement if at any time during the three business day
period commencing on the Determination Date (as defined in the merger agreement)
the final FCCO Stock Price (as defined in the merger agreement) is greater
than
$15.32. Within three business days of receiving DeKalb’s notice of termination,
First Community will have the option of increasing the per share purchase price
to be received by DeKalb shareholders so that it would equal
$15.32.
To
the
extent permitted by law, DeKalb and First Community, with the approval of their
respective boards of directors, may amend the merger agreement by written
agreement at any time without the approval of DeKalb shareholders. However,
after the approval of the merger proposal by DeKalb shareholders, no amendment
may decrease the consideration to be received without the further approval
of
DeKalb shareholders.
Prior
to
or at the effective time of the merger, either DeKalb or First Community may
waive any default in the performance of any term of the merger agreement by
the
other party, may waive or extend the time for the fulfillment by the other
party
of any of its obligations under the merger agreement, and may waive any of
the
conditions precedent to the obligations of such party under the merger
agreement, except any condition that, if not satisfied, would result in the
violation of an applicable law.
Under
the
merger agreement, each of First Community and DeKalb has agreed, except as
otherwise contemplated by the merger agreement or with the prior written consent
of the other party, to:
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operate
its business only in the usual, regular, and ordinary
course;
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use
commercially reasonable efforts to preserve intact its business
organizations and assets and maintain its rights and
franchises;
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use
commercially reasonable efforts to cause its representations and
warranties to be correct at all times;
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take
no action which would (1) adversely affect the ability of any party
to
obtain any consents required for the transactions contemplated by
the
merger agreement without imposition of a condition or restriction
which,
in the reasonable judgment of the board of directors of First Community
or
DeKalb, as applicable, would so materially adversely impact the economic
or business benefits of the transactions contemplated by the merger
agreement as to render inadvisable the consummation of the merger,
or (2)
adversely affect in any material respect the ability of either party
to
perform its covenants and agreements under the merger agreement;
and
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use
its best efforts to provide all information requested by First Community
related to loans or other transactions made by DeKalb with a value
equal
to or exceeding $250,000.
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Further,
DeKalb has agreed, except as otherwise contemplated by the merger agreement
or
with the prior written consent of First Community, to:
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use
its best efforts to provide all information requested by First Community
related to loans or other transactions made by DeKalb with a value
equal
to or exceeding $300,000;
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consult
with First Community prior to entering into or making any loans or
other
transactions with a value equal to or exceeding $600,000, other than
residential mortgage loans for which DeKalb has a commitment to buy
from a
reputable investor; and
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consult
with First Community prior to entering into or making any loans that
exceed regulatory loan to value
guidelines.
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In
addition, DeKalb has agreed in the merger agreement not to take certain actions
pending consummation of the merger without the prior consent of First Community.
Such actions include, without limitation:
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amending
its articles of incorporation, bylaws, or other governing corporate
instruments;
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becoming
responsible for any obligation for borrowed money in excess of an
aggregate of $50,000, except in the ordinary course of business consistent
with past practices or allowing the imposition of a lien on any
asset;
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acquiring
or exchanging (other than exchanges in the ordinary course under
employee
benefit plans) any shares (or securities convertible into any shares)
of
DeKalb capital stock or paying any dividend on its common
stock;
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subject
to certain exceptions, issuing, selling, or pledging additional shares
of
DeKalb common stock, any rights to acquire any such stock, or any
security
convertible into such stock;
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adjusting
or reclassifying any DeKalb capital stock or issuing or authorizing
the
issuance of any other securities in respect of, or in substitution
for,
shares of DeKalb common stock or its subsidiary’s common stock, or
otherwise disposing of any asset other than in the ordinary course
for
reasonable and adequate
consideration;
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purchasing
any securities or making any material investments in any person or
otherwise acquiring direct or indirect control over any person, subject
to
certain exceptions;
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granting
any increase in compensation or benefits to employees, officers,
or
directors of DeKalb, paying any bonus, entering into or amending
any
severance agreements with employees, officers, or directors of DeKalb
(except for the payment of $400,000 to Mr. Bochette as described
elsewhere
in this proxy statement/prospectus), or granting any increase in
compensation or other benefits to directors of
DeKalb;
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except
as contemplated by the merger agreement, entering into or amending
(unless
required by law) any employment contract that does not give it the
unconditional right to terminate the agreement following the effective
date of the merger without liability other than for services already
rendered;
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subject
to certain exceptions, adopting any new employee benefit plan or
materially changing any existing plan or
program;
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making
any significant change in tax or accounting methods, except for any
change
required by law or generally accepted accounting
principles;
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commencing
any litigation other than in accordance with past practice or settling
any
litigation for money damages or which places material restrictions
on
operations;
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except
in the ordinary course of business, modifying, amending, or terminating
any material contracts (including any loan with respect to any extension
of credit with an unpaid balance exceeding $600,000) or waiving,
releasing, or assigning any material rights or claims, or making
any
adverse changes in the mix, rates, terms, or maturities of DeKalb’s
deposits and other liabilities;
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causing
its allowance for loan losses to be less than 1.00% of loans and
leases
and other credits; or
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taking
any action or failing to take any action that at the time of such action or
inaction is reasonably likely to prevent, or would be reasonably likely to
materially interfere with, the consummation of the merger.
DeKalb
has also agreed that neither it, nor its affiliates or representatives, will
solicit an acquisition proposal (generally, a tender offer or proposal for
a
merger, asset acquisition, or other business combination), other than the
transactions contemplated by the merger agreement. Pursuant to the merger
agreement, except to the extent necessary to comply with the fiduciary duties
of
its board of directors, neither DeKalb, nor any of its affiliates or
representatives, will furnish any non-public information that it is not legally
obligated to furnish, or negotiate with respect to, or enter into any contract
with respect to, any acquisition proposal. However, DeKalb may communicate
information about an acquisition proposal to its shareholders if and to the
extent that it is required to do so in order to comply with its legal
obligations as advised by counsel. In the merger agreement, DeKalb also agreed
to terminate any negotiations conducted prior to the date of the merger
agreement with any other parties with respect to any of the foregoing and agreed
to use its reasonable efforts to cause its representatives to comply with any
of
the foregoing.
The
merger agreement provides that each party will be responsible for its own direct
costs and expenses incurred in connection with the negotiation and consummation
of the transactions contemplated by the merger agreement. In
the
case of DeKalb, these expenses will be paid at or before closing and prior
to
the effective time of the merger.
The
merger agreement provides for the reimbursement of First Community’s out-of-
pocket expenses, not to exceed $150,000, if First Community terminates the
merger agreement because:
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the
DeKalb board of directors fails to reaffirm its approval upon First
Community’s request for such reaffirmation of the merger or the DeKalb
board of directors resolves not to reaffirm the
merger;
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the
DeKalb board of directors fails to include in the proxy statement
its
recommendation, without modification or qualification, that the
shareholders approve the merger or the DeKalb board of directors
withdraws, qualifies, modifies, or proposes publicly to withdraw,
qualify,
or modify, in a manner adverse to First Community, the recommendation
that
the shareholders approve the
merger;
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the
DeKalb board of directors affirms, recommends, or authorizes entering
into
any acquisition transaction other than the merger or, within five
business
days after commencement of any tender or exchange offer for any shares
of
its common stock, the DeKalb board of directors makes any recommendation
other than against acceptance of such tender or exchange offer;
or
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the
DeKalb board of directors negotiates or authorizes the conduct of
negotiations (and five business days have elapsed without such
negotiations being discontinued) with a third party regarding an
acquisition proposal other than the
merger.
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If
within
12 months after such termination DeKalb consummates another acquisition
transaction (as defined in the merger agreement), DeKalb must pay an additional
$500,000 termination fee (less the amount paid for First Community’s out-of-
pocket expenses).
If
the
board of directors of DeKalb determines, after consultation with legal counsel,
that in light of a superior proposal (as defined in the merger agreement),
it is
necessary to terminate the agreement to comply with its fiduciary duties, and
within 12 months of such termination an acquisition transaction has been
announced or an acquisition agreement has been entered into by DeKalb, DeKalb
must pay First Community’s out-of- pocket expenses as described above. If within
12 months after such termination, DeKalb consummates the acquisition
transaction, DeKalb must pay the additional termination fee as described
above.
Finally,
if the merger agreement is terminated following the commencement of any tender
or exchange offer for more than 50% of the shares of DeKalb and within 12 moths
of such termination an acquisition transaction has occurred involving the tender
offeror or its affiliates and DeKalb, then DeKalb must reimburse First
Community’s out-of-pocket expenses and pay the additional termination as
described above.
The
issuance of the shares of First Community common stock to be issued to DeKalb
shareholders in the merger has been registered under the Securities Act of
1933.
These shares may be traded freely and without restriction by those shareholders
not deemed to be “affiliates” of DeKalb or First Community as that term is
defined under the Securities Act. Any subsequent transfer of such shares,
however, by any person who is an affiliate of DeKalb at the time the merger
is
submitted for a vote or consent of the shareholders of DeKalb will, under
existing law, require either:
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the
registration under the Securities Act of the subsequent transfer
of the
shares of First Community common
stock;
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compliance
with Rule 145 promulgated under the Securities Act (permitting limited
sales under certain circumstances);
or
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the
availability of another exemption from
registration.
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An
“affiliate” of DeKalb, as defined by the rules promulgated pursuant to the
Securities Act, is a person who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
DeKalb. DeKalb has agreed that it will use its reasonable efforts to cause
each
person or entity that is an “affiliate” for purposes of complying with Rule 145
to enter into a written agreement relating to such restrictions on sale or
other
transfer.
The
merger will be accounted for using the purchase method of accounting, with
First
Community being treated as the acquiring entity for accounting purposes. Under
the purchase method of accounting, the assets and liabilities of DeKalb as
of
the effective time will be recorded at their respective fair values and added
to
those of First Community. Financial statements issued after consummation of
an
acquisition accounted for as a purchase would reflect such values and would
not
be restated retroactively to reflect the historical financial position or
results of operations of the acquired company.
Chapter
13 of the South Carolina Business Corporation Act sets forth the rights of
the
shareholders of DeKalb who object to the merger. The following is a summary
of
the material terms of the statutory procedures to be followed by a shareholder
in order to dissent from the merger and perfect dissenters’ rights under the
South Carolina Business Corporation Act. A copy of Chapter 13 of the South
Carolina Business Corporation Act is attached as Appendix B to this proxy
statement/prospectus. The
only rights of dissent available to DeKalb shareholders are those provided
in
the law. Nothing in this proxy statement/prospectus shall be deemed to create
or
grant any such rights.
If
you
elect to exercise such a right to dissent and demand appraisal, you must satisfy
each of the following conditions:
(a) you
must
give to DeKalb and DeKalb must actually receive, before the vote at the
shareholders’ special meeting on approval or disapproval of the merger proposal
is taken, written notice of your intent to demand payment for your shares if
the
merger is effectuated (this notice must be in addition to and separate from
any
proxy or vote against the merger proposal; neither voting against, abstaining
from voting, nor failing to vote on the merger proposal will constitute a notice
within the meaning of the South Carolina Business Corporation Act);
and
(b) you
must
not vote in favor of the merger proposal. A failure to vote or a vote against
the merger proposal will satisfy this requirement. The return of a signed proxy
which does not specify whether you vote in favor or against approval of the
merger proposal will not constitute a waiver of your dissenters’ rights. If you
notify DeKalb that you intend to dissent, a vote cast in favor of the merger
proposal by the holder of the proxy will not disqualify you from demanding
payment for your shares.
If
the
requirements of (a) and (b) above are not satisfied and the merger proposal
becomes effective, you will not be entitled to payment for your shares under
the
provisions of Chapter 13 of the South Carolina Business Corporation
Act.
If
you
are a dissenting DeKalb shareholder, any notices should be addressed to DeKalb
Bankshares, Inc., 631 West DeKalb Street, Camden, South Carolina 29020,
Attention: William C. Bochette, III. The notice must be executed by the holder
of record of the shares of DeKalb common stock as to which dissenters’ rights
are to be exercised. A beneficial owner may assert dissenters’ rights only if he
dissents with respect to all shares of DeKalb common stock of which he is the
beneficial owner. With respect to shares of DeKalb common stock which are owned
of record by a voting trust or by a nominee, the beneficial owner of such shares
may exercise dissenters’ rights if such beneficial holder also submits to DeKalb
the name and address of the record shareholder of the shares, if known to him.
A
record owner, such as a broker, who holds shares of DeKalb common stock as
a
nominee for others may exercise dissenters’ rights with respect to the shares
held for all or less than all beneficial owners of shares as to which such
person is the record owner, provided such record owner dissents with respect
to
all DeKalb common stock beneficially owned by any one person. In such case,
the
notice submitted by the broker as record owner must set forth the name and
address of the shareholder who is objecting to the merger proposal and demanding
payment for such person’s shares.
If
you
properly dissent and the merger proposal is approved, DeKalb must mail by
registered or certified mail, return receipt requested, a written dissenters’
notice to you. This notice must be sent no later than 10 days after the
shareholder approval of the merger proposal. The dissenters’ notice will state
where your payment demand must be sent, and where and when certificates for
shares of DeKalb common stock must be deposited; supply a form for demanding
payment; set a date by which DeKalb must receive your payment demand (not fewer
than 30 days nor more than 60 days after the dissenters’ notice is mailed and
which must not be earlier than 20 days after the demand date); and include
a
copy of Chapter 13 of the South Carolina Business Corporation Act.
If
you
receive a dissenters’ notice, you must demand payment and deposit your share
certificates in accordance with the terms of the dissenters’ notice. If you
demand payment and deposit your share certificates, you retain all other rights
of a shareholder until these rights are canceled or modified by the merger.
If
you do not demand payment or deposit your share certificates where required,
each by the date set in the dissenters’ notice, you are not entitled to payment
for your shares under the South Carolina Business Corporation Act.
Within
30
days after receipt of your demand for payment, DeKalb is required to pay you
the
amount it estimates to be the fair value of your shares, plus interest accrued
from the effective date of the merger to the date of payment. The payment must
be accompanied by:
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DeKalb’s
most recent available balance sheet, income statement, and statement
of
cash flows as of the end of or for the fiscal year ending not more
than 16
months before the date of payment, and the latest available interim
financial statements, if any;
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an
explanation of how DeKalb estimated the fair value of the
shares;
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an
explanation of the interest
calculation;
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a
statement of the dissenters’ right to demand payment (as described below);
and
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a
copy of Chapter 13 of the South Carolina Business Corporation
Act.
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If
the
merger is not consummated within 60 days after the date set for demanding
payment and depositing share certificates, DeKalb must return your deposited
certificates. If after returning your deposited certificates the merger is
consummated, DeKalb must send you a new dissenters’ notice and repeat the
payment demand procedure.
Demand
for Payment. You
may,
however, notify DeKalb in writing of your own estimate of the fair value of
your
shares and amount of interest due, and demand payment of the excess of your
estimate of the fair value of your shares over the amount previously paid by
DeKalb if:
(a) you
believe that the amount paid is less than the fair value of DeKalb common stock
or that the interest is incorrectly calculated;
(b) DeKalb
fails to make payment of its estimate of fair value to you within 30 days after
receipt of a demand for payment; or
(c) the
merger not having been consummated, DeKalb does not return your deposited
certificates within 60 days after the date set for demanding
payment.
You
waive
the right to demand payment unless you notify DeKalb of your demand in writing
within 30 days of DeKalb’s payment of its estimate of fair value (with respect
to clause (a) above) or DeKalb’s failure to perform (with respect to clauses (b)
and (c) above). If you fail to notify DeKalb of your demand within such 30-day
period, you shall be deemed to have withdrawn your shareholder’s dissent and
demand for payment.
Appraisal
Proceeding. If
your
demand for payment remains unsettled, DeKalb must commence a proceeding within
60 days after receiving the demand for additional payment by filing a complaint
with the South Carolina Court of Common Pleas in Kershaw County to determine
the
fair value of the shares and accrued interest. If DeKalb does not commence
the
proceeding within such 60-day period, DeKalb shall pay you the amount you
demanded.
The
court
in such an appraisal proceeding will determine all costs of the proceeding
and
assess the costs as it finds equitable. The proceeding is to be tried as in
other civil actions; however, you will not have the right to a trial by jury.
The court may also assess the fees and expenses of counsel and expenses for
the
respective parties, in the amounts the court finds equitable: (a) against DeKalb
if the court finds that it did not comply with the statute; or (b) against
DeKalb or you, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith.
If
the court finds that the services of counsel for you were of substantial benefit
to other dissenting shareholders, and that the fees for those services should
not be assessed against DeKalb, the court may award to these counsel reasonable
fees to be paid out of the amounts awarded the dissenting shareholders who
were
benefited. If DeKalb failed to commence an appraisal proceeding within 60 days,
the court shall assess the costs of the proceedings and the fees and expenses
of
counsel for DeKalb.
The
summary set forth above does not purport to be a complete statement of the
provisions of the South Carolina Business Corporation Act relating to the rights
of dissenting shareholders and is qualified in its entirety by reference to
the
applicable sections of the South Carolina Business Corporation Act, which are
included as Appendix B to this proxy statement/prospectus. If you intend to
exercise your dissenters’ rights, you are urged to carefully review Appendix B
and to consult with legal counsel so as to be in strict compliance
therewith.
General
The
articles of incorporation of First Community authorize the issuance of capital
stock consisting of 10,000,000 shares of common stock, $1.00 par value per
share, and 10,000,000 shares of preferred stock, $1.00 par value per share.
As
of , 2006 there
were shares of First
Community common stock issued and outstanding and no shares of First Community
preferred stock issued and outstanding.
In
the
future, the authorized but unissued and unreserved shares of First Community
common stock will be available for issuance for general purposes, including,
but
not limited to, possible issuance as stock dividends or stock splits, future
mergers or acquisitions, or future private placements or public offerings.
Except as may be required to approve a merger or other transaction in which
the
additional authorized shares of First Community common stock would be issued,
no
shareholder approval will be required for the issuance of those shares. See
section entitled “Comparative
Rights of First Community and DeKalb Shareholders” for
a
discussion of the rights of the holders of First Community common stock as
compared to the holders of DeKalb common stock.
Common
Stock
General.
Each
share of First Community common stock has the same relative rights as, and
is
identical in all respects to, each other share of First Community common stock.
Dividend
Rights.
The
holders of common stock of First Community are entitled to receive and share
equally in any dividends as may be declared by the board of directors of First
Community out of funds legally available for the payment of dividends. The
payment of dividends by First Community is subject to limitations imposed by
law
and applicable regulations. The Federal Reserve Board generally prohibits bank
holding companies from paying dividends except out of operating earnings and
unless the prospective rate of earnings retention appears consistent with the
holding company’s capital needs, asset quality, and overall financial condition.
Notwithstanding the above, the ability of First Community to pay dividends
to
the holders of shares of First Community common stock will be completely
dependent upon the amount of dividends its subsidiary, First Community Bank,
is
permitted to pay to First Community. The ability of a national bank to pay
dividends is restricted under applicable law and regulations. The National
Bank
Act states that a national banking association, such as First Community Bank,
may only pay dividends out of undivided profits. Additionally, a national
banking association may not pay dividends until its surplus fund equals its
common capital, unless at least 10% of its net income during the past six month
period has been carried to its surplus fund (in the case of quarterly or
semi-annual dividends) or (in the case of annual dividends) at least 10% of
its
net income during the past 12 months. Also, under federal banking law, no cash
dividend may be paid if the bank is undercapitalized or insolvent or if payment
of the cash dividend would render the bank undercapitalized or insolvent, and
no
cash dividend may be paid by the bank if it is in default of any deposit
insurance assessment due to the FDIC.
Voting
Rights.
Each
share of First Community common stock will entitle the holder thereof to one
vote on all matters upon which shareholders have the right to vote. Currently,
the board of directors of First Community is comprised of 14 directors, who
are
elected in staggered terms of three years. Following the consummation of the
merger, the board will be increased to 15 directors. The new director will
be a
former DeKalb director other than Mr. Bochette. Shareholders of First Community
are not entitled to cumulate their votes for the election of directors.
Liquidation
Rights.
In the
event of any liquidation, dissolution, or winding up of First Community, the
holders of shares of First Community common stock will be entitled to receive,
after payment of all debts and liabilities of First Community, all remaining
assets of First Community available for distribution in cash or in kind. If
First Community issued preferred stock, the holders of preferred stock may
have
priority over the holders of common stock in the event of liquidation or
dissolution.
No
Preemptive Rights; Redemption and Assessment.
Holders
of shares of First Community common stock are not entitled to preemptive rights
with respect to any shares that may be issued. First Community common stock
is
not subject to redemption or any sinking fund and the outstanding shares are
fully paid and non-assessable.
Preferred
Stock
First
Community may issue preferred stock with such designations, powers, preferences,
and rights as First Community's board of directors may from time to time
determine. The board of directors can, without shareholder approval, issue
preferred stock with voting, dividend, liquidation, and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. None of the shares of the authorized preferred stock will be issued
in
connection with the merger and there are no current plans to issue preferred
stock.
Certain
Articles and Bylaw Provisions Having Potential Anti-Takeover
Effects
First
Community's articles of incorporation and bylaws contain provisions that could
make an acquisition of First Community by means of a tender offer, proxy
contest, or otherwise more difficult. Certain provisions will also render the
removal of the incumbent board of directors or management of First Community
more difficult. These provisions may have the effect of deterring or defeating
a
future takeover attempt that is not approved by First Community's board of
directors, but which First Community shareholders may deem to be in their best
interests or in which shareholders may receive a substantial premium for their
shares over then current market prices. As a result, shareholders who might
desire to participate in such a transaction may not have the opportunity to
do
so. The following description of these provisions is only a summary and does
not
provide all of the information contained in First Community's articles of
incorporation and bylaws. See "Additional Information" as to where to obtain
a
copy of these documents.
Authorized
but Unissued Stock.
The
authorized but unissued shares of common stock and preferred stock will be
available for future issuance without shareholder approval. These additional
shares may be used for a variety of corporate purposes, including future private
or public offerings to raise additional capital, corporate acquisitions, and
employee benefit plans. The existence of authorized but unissued and unreserved
shares of common stock and preferred stock may enable the board of directors
to
issue shares to persons friendly to current management, which could render
more
difficult or discourage any attempt to obtain control of First Community by
means such as a proxy contest, tender offer, or merger, and thereby protect
the
continuity of the company's management.
Supermajority
Shareholder Vote Required for Merger.
The
articles require the affirmative vote of the holders of at least two-thirds
of
the outstanding shares of common stock entitled to vote to approve any merger,
consolidation, or sale of First Community or any substantial part of the
company's assets.
Number
and Qualifications of Directors.
The
articles and bylaws provide that the number of directors shall be fixed from
time to time by resolution adopted by a majority of the directors then in
office, but may not consist of fewer than nine nor more than 25 members. The
bylaws also provide that no individual who is or becomes a Business Competitor
(as defined below) or who is or becomes affiliated with, employed by, or a
representative of any individual, corporation, or other entity which the board
of directors, after having such matter formally brought to its attention,
determines to be in competition with First Community or any of its subsidiaries
(any such individual, corporation, or other entity being a "Business
Competitor") shall be eligible to serve as a director if the board of directors
determines that it would not be in First Community’s best interests for such
individual to serve as a director of the company. Any financial institution
having branches or affiliates within Richland or Lexington Counties, South
Carolina shall be presumed to be a Business Competitor unless the board of
directors determines otherwise.
Classified
Board of Directors.
The
articles and bylaws divide the board of directors into three classes of
directors serving staggered three-year terms. As a result, approximately
one-third of the board of directors will be elected at each annual meeting
of
shareholders. The classification of directors, together with the provisions
in
the articles and bylaws described below that limit the ability of shareholders
to remove directors and that permit the remaining directors to fill any
vacancies on the board of directors, have the effect of making it more difficult
for shareholders to change the composition of the board of directors. As a
result, at least two annual meetings of shareholders may be required for the
shareholders to change a majority of the directors.
Removal
of Directors and Filling Vacancies.
Under
the bylaws, removal of directors without cause requires the approval of the
holders of two-thirds of the shares entitled to vote at an election of
directors, and all
vacancies
on the board of directors, including those resulting from an increase in the
number of directors, may be filled by a majority of the remaining directors,
even if they do not constitute a quorum. When a director resigns effective
at a
future date, a majority of directors then in office, including the director
who
is to resign, may vote on filling the vacancy.
Advance
Notice Requirements for Shareholder Proposals and Director
Nominations.
The
bylaws establish advance notice procedures with regard to shareholder proposals
and the nomination, other than by or at the direction of the board of directors
or a committee of the board, of candidates for election as directors. These
procedures provide that the notice of shareholder proposals and shareholder
nominations for the election of directors at any meeting of shareholders must
be
in writing and be received by the secretary of First Community not later than
90
days prior to the meeting. First Community may reject a shareholder proposal
or
nomination that is not made in accordance with such procedures.
Certain
Nomination Requirements.
Pursuant to the bylaws, First Community has established certain nomination
requirements for an individual to be elected as a director of the company at
any
annual or special meeting of the shareholders, including that the nominating
party provide First Community within a specified time prior to the meeting
(i)
notice that such party intends to nominate the proposed director; (ii) the
name
and certain biographical information on the nominee; and (iii) a statement
that
the nominee has consented to the nomination. The chairman of any shareholders’
meeting may, for good cause shown, waive the operation of these provisions.
These provisions could reduce the likelihood that a third party would nominate
and elect individuals to serve on First Community's board of
directors.
Business
Combinations with Interested Shareholders.
First
Community is subject to the South Carolina business combination statute, which
restricts mergers and other similar business combinations between public
companies headquartered in South Carolina and any 10% shareholder of the
company. The statute prohibits such a business combination for two years
following the date the person acquires shares to become a 10% shareholder unless
the business combination or such purchase of shares is approved by a majority
of
the company's outside directors. The statute also prohibits such a business
combination with a 10% shareholder at any time unless the transaction complies
with First Community's articles of incorporation and either (i) the business
combination or the shareholder's purchase of shares is approved by a majority
of
the company's outside directors; (ii) the business combination is approved
by a
majority of the shares held by the company's other shareholders at a meeting
called no earlier than two years after the shareholder acquired the shares
to
become a 10% shareholder; or (iii) the business combination meets specified
fair
price and form of consideration requirements.
Consideration
of Other Constituencies in Mergers.
The
articles grant the board of directors the discretion, when considering whether
a
proposed merger or similar transaction is in the best interests of First
Community and its shareholders, to take into account the effect of the
transaction on the employees, customers, and suppliers of the company and upon
the communities in which the offices of the company are located.
Transfer
Agent and Registrar
The
transfer agent and registrar for First Community’s common stock is Registrar
& Transfer Company.
General
The
following is a comparison of certain rights of DeKalb shareholders and those
of
First Community shareholders. Certain significant differences in the rights
of
DeKalb shareholders and those of First Community shareholders arise from
differing provisions of DeKalb’s and First Community’s respective governing
corporate instruments.
The
following summary does not purport to be a complete statement of the provisions
affecting, and differences between, the rights of DeKalb shareholders and those
of First Community shareholders. The identification of specific provisions
or
differences is not meant to indicate that other equally or more significant
differences do not exist. This summary is qualified in its entirety by reference
to the South Carolina Business Corporation Act of 1988 and to the respective
governing corporate instruments of DeKalb and First Community, to which DeKalb
shareholders are referred.
Authorized
Capital Stock
DeKalb
DeKalb
is
authorized to issue 20,000,000 shares of common stock, no par value, of which
shares were issued and outstanding as of the date of this proxy
statement/prospectus. DeKalb’s articles of incorporation do not provide that
shareholders have a preemptive right to acquire authorized and unissued shares
of DeKalb.
First
Community
First
Community is authorized to issue 10,000,000 shares of common stock, par value
$1.00 per share, of which shares were issued and outstanding as of the date
of
this proxy statement/prospectus, and 10,000,000 shares of preferred stock,
par
value $1.00 per share. First Community’s articles of incorporation do not
provide that shareholders have a preemptive right to acquire authorized and
unissued shares of First Community.
Size
of Board of Directors
DeKalb
DeKalb’s
articles and bylaws provide that the board must consist of six or more
directors, with the exact number fixed by the board of directors. The DeKalb
board of directors currently has 10 members.
First
Community
First
Community’s bylaws provide that the board must consist of not less than nine
directors and no more than 25 directors, with the exact number fixed by the
board of directors. First Community’s board of directors is currently comprised
of 14 persons. The merger agreement requires that the board increase the number
of members from 14 to 15 members, and to fill the vacancies by appointing one
former director of DeKalb mutually acceptable to First Community and
DeKalb.
Classification
of Directors
DeKalb
DeKalb’s
articles of incorporation divide the board of directors into three classes
of
directors, with each class accounting for one-third and with each class being
elected to a staggered three-year term.
First
Community
First
Community’s articles of incorporation also divide the board of directors into
three classes of directors serving staggered three-year terms.
Election
of Directors
DeKalb
DeKalb’s
bylaws provide that all elections are determined by a plurality of the votes
cast, in person or by proxy, at a meeting of shareholders at which a quorum
is
present. DeKalb’s articles of incorporation and bylaws provide that shareholders
do not have cumulative voting rights for the election of directors.
First
Community
First
Community’s bylaws also provide that all elections are determined by a plurality
of the votes cast, in person or by proxy, at a meeting of shareholders at which
a quorum is present. First Community’s articles of incorporation provide that
shareholders do not have cumulative voting rights.
Removal
of Directors
DeKalb
DeKalb’s
articles of incorporation provide that any director may be removed by
shareholders, with or without cause; provide, however, that an affirmative
vote
of the holders of at least 80% of the outstanding shares is required to remove
directors without cause.
First
Community
First
Community’s articles of incorporation require the affirmative vote of the
holders of not less than two-thirds of the outstanding voting securities of
First Community to remove any director.
Filling
Vacancies on the Board of Directors
DeKalb
DeKalb’s
bylaws provide that
vacancies on the board of directors may be filled by the affirmative vote of
a
majority of the remaining members of the board of directors even if less than
a
quorum exists. The term of a director appointed to fill a vacancy expires at
the
next shareholders’ meeting wherein directors are elected. If the directors fail
or are unable to fill such vacancies within 30 days, then the president or
secretary must call a special meeting of shareholders to fill such vacancy.
The
board is prohibited from increasing or decreasing the board by more than 30%
of
the number of directors last approved by shareholders. Any vacancy created
by
increasing the number of directors may also be filled by the
shareholders.
First
Community
First
Community’s bylaws provide that vacancies on the board of directors shall be
filled by a majority of the remaining members of the board of directors.
Shareholders may elect a director to fill any vacancy not filled by the
directors at a special meeting of shareholders.
Nomination
of Director Candidates
DeKalb
DeKalb’s
articles of incorporation provide that any shareholder entitled to vote for
the
election of directors may make nominations for the election of directors by
giving written notice to the secretary of DeKalb at least 90 days prior to
the
annual meeting of shareholders at which directors are to be
elected.
First
Community
First
Community’s bylaws provide that any shareholder entitled to vote for the
election of directors may make nominations for the election of directors by
giving written notice to the secretary of First Community at least 90 days
prior
to the annual meeting of shareholders at which directors are to be elected,
unless this requirement is waived in advance of the meeting by the board of
directors. With respect to an election at a special meeting of shareholders,
nominations must be received no later than the close of business on the seventh
day following the date on which the notice is first given to
shareholders.
Shareholder
Action Without Meeting
DeKalb
Under
South Carolina law, any action required or permitted to be taken by shareholders
at a meeting may be taken without a meeting if a written consent describing
the
action to be taken is signed by all of the shareholders entitled to vote with
respect to the subject matter thereof.
First
Community
First
Community’s organizational documents do not alter the default rules under South
Carolina law.
Calling
Meetings of Shareholders
DeKalb
DeKalb
bylaws provide that special meetings of shareholders may be called at any time
for any purpose by DeKalb’s president or chairman of the board of directors, or
by a majority of the board of directors. DeKalb must call a special meeting
when
requested in writing by shareholders owning shares representing at least
one-tenth of all outstanding votes entitled to be cast on any issue at the
meeting.
First
Community
First
Community’s bylaws provide that special meetings of shareholders may be called
at any time for any purpose by First Community’s chief executive officer,
president, or chairman of the board of directors, or by a majority of the board
of directors. First Community must call a special meeting when requested in
writing by shareholders owning shares representing at least one-tenth of all
outstanding votes entitled to be cast on any issue at the meeting.
Indemnification
of Directors, Officers, and Employees
DeKalb
South
Carolina law prescribes the extent to which directors and officers will be
indemnified by DeKalb. A
corporation, with certain exceptions, may to indemnify a current or former
director against liability if (i) he conducted himself in good faith, (ii)
he
reasonably believed (x) that his conduct in his official capacity with the
corporation was in its best interest and (y) his conduct in other capacities
was
at least not opposed to the corporation's best interest, and (iii) in the case
of any criminal proceeding, he had no reasonable cause to believe his conduct
was unlawful. A corporation may not indemnify a current or former director
in
connection with a
proceeding
by or in the right of the corporation in which he was adjudged liable to the
corporation or in connection with a proceeding charging improper personal
benefit to him. The above standard of conduct is determined by the board of
directors or a committee thereof or special legal counsel or the
shareholders
DeKalb
must indemnify a director or officer in the defense of any proceeding to which
such person was a party because of his or her capacity as officer or director
against reasonable expenses when such person is wholly successful in his or
her
defense, unless the articles of incorporation provide otherwise. Upon
application, the court may order indemnification of the director or officer
if
such person is adjudged fairly and reasonably so entitled. DeKalb also may
indemnify and advance expenses to an officer, employee or agent who is not
a
director to the same extent as a director or as otherwise set forth in the
corporation's articles or bylaws or by resolution of the board of directors
or
by contract.
First
Community
The
bylaws for First Community follow the standards under South Carolina as outline
above.
Limitation
of Liability for Directors
Each
of
DeKalb’s and First Community’s articles of incorporation provides that a
director’s liability is eliminated or limited to the fullest extent permitted by
South Carolina law. A director is not personally liable to the company or any
of
its shareholders for monetary damages for breach of any duty as director, except
for liability:
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for
any breach of the director’s duty of loyalty to the corporation or its
shareholders;
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for
acts or omissions not in good faith or which involved gross negligence,
intentional misconduct, or a knowing violation of law;
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for
unlawful corporate distributions;
or
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for
any transaction from which the director derived an improper personal
material tangible benefit.
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Amendment
to Articles of Incorporation
DeKalb
DeKalb’s
articles provide that any amendments to Article 5 of the articles must be
approved by the affirmative vote of the holders of 80% of the outstanding shares
of the corporation, unless at least two-thirds of the board of directors
approves the amendment. In that case, the amendment need only be approved by
the
affirmative vote of the holders of two-thirds of the outstanding shares. All
other amendments to the articles may be approved by the affirmative vote of
the
holders of two-thirds of the outstanding shares.
First
Community
South
Carolina law provides that a corporation may amend its articles of incorporation
if the board of directors proposes the amendment to the shareholders, and the
amendment receives the requisite shareholder approval. Unless a corporation’s
articles of incorporation provide otherwise, amendments must be approved by
two-thirds of all votes entitled to be cast on the matter, as well as two-thirds
of the votes entitled to be cast on the matter within each voting group entitled
to vote as a separate voting group on the amendment. First Community’s articles
do not alter the default provisions of South Carolina law.
Amendment
to Bylaws
DeKalb
DeKalb’s
bylaws provide that the board of directors may amend the bylaws upon the
affirmative vote of a majority of the directors present at a meeting at which
a
quorum is present unless (i) the shareholders in adopting, amending or repealing
a particular bylaw expressly provide that the board of directors may not amend
or repeal that bylaw or (ii) the bylaw establishes, amends, or deletes a
supermajority shareholder quorum or voting requirement.
Shareholders
may amend the bylaws upon the affirmative vote of the holders of a majority
the
shareholders entitled to vote for the election of directors.
First
Community
According
to First Community’s articles, the board of directors may amend the bylaws upon
the affirmative vote of a majority directors or unanimous written consent.
Shareholders may amend the bylaws only upon the affirmative vote of the holders
of not less than two-thirds of the votes entitled to be cast.
Shareholder
Vote on Fundamental Issues
DeKalb
DeKalb’s
articles of incorporation provide that a merger, exchange, or consolidation
of
DeKalb with, or a sale, exchange, or lease of all or substantially all the
assets of DeKalb to, any person or entity must be approved by holders of not
less than 80% of the outstanding voting stock if two-thirds of the board of
directors does not approve such transaction. If two-thirds of the board of
directors approves the transaction, approval is governed by the default rules
under South Carolina described below.
First
Community
Under
South Carolina law, a plan of merger must generally be approved by the
affirmative vote of the holders of at least two-thirds of the votes entitled
to
be cast on the plan regardless of the class or voting group to which the shares
belong, and two-thirds of the votes entitled to be cast on the plan within
each
voting group entitled to vote as a separate voting group on the plan. A
corporation’s articles of incorporation may require a lower or higher vote for
approval, but the required vote must be at least a majority of the votes
entitled to be cast on the plan by each voting group entitled to vote separately
on the plan. First Community’s articles of incorporation do not alter the
default rules of South Carolina law.
Under
South Carolina law, to authorize the sale, lease, exchange, or other disposition
of all or substantially all of the property of a corporation, other than in
the
usual and regular course of business, or to voluntarily dissolve the
corporation, South Carolina law requires the affirmative vote of at least
two-thirds of all the votes entitled to be cast on the transaction. A
corporation’s articles of incorporation may require a lower or higher vote for
approval, but the required vote must be at least a majority of all the votes
entitled to be cast on the transaction. First Community’s articles of
incorporation do not alter the default rules of South Carolina law.
Control
Share Acquisition Provisions
DeKalb
South
Carolina law contains provisions that, under certain circumstances, would
preclude an acquiror of the shares of a South Carolina corporation who crosses
one of three voting thresholds (20%, 33 1/3% or 50%) from obtaining voting
rights with respect to such shares unless a majority in interest of the
disinterested shareholders of the corporation votes to accord voting power
to
such shares.
The
legislation provides that, if authorized by the articles of incorporation or
bylaws prior to the occurrence of a control share acquisition, the corporation
may redeem the control shares for their fair value if the acquiring person
has
not complied with certain procedural requirements (including the filing of
an
"acquiring person statement "with the corporation within 60 days after the
control share acquisition) or if the control shares are not accorded full voting
rights by the shareholders. DeKalb is not authorized by its articles of
incorporation or bylaws to redeem control shares pursuant to such
legislation.
First
Community
First
Community has specifically opted out of coverage of the control share
acquisition provisions of South Carolina law.
Business
Combination Statute
South
Carolina law prohibits specified “business combinations” with “interested
shareholders” unless certain conditions are satisfied. The act defines an
“interested shareholder” as any person (other than the corporation or any of its
subsidiaries) that (i) beneficially owns 10% or more of the corporation’s
outstanding voting shares or (ii) at any time within the preceding two-year
period beneficially owned 10% of the voting power of the corporation’s
outstanding shares and is an affiliate or associate of the
corporation.
Covered
business combinations with interested shareholders or an affiliate or associate
of an interested shareholder include, among other transactions:
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merger
of the corporation;
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sale,
lease, exchange, mortgage, pledge, transfer, or other disposition
of
assets having a value equal to 10% or more of the value of all assets
of
the corporation, the value of all outstanding shares of the corporation,
or the earning power or net income of the
corporation;
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transfer
of shares of the corporation equaling 5% or more of the market value
of
all outstanding shares of the corporation;
and
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dissolution
or liquidation of the corporation proposed by or under an arrangement
with
an interested shareholder or its affiliate or
associate.
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Covered
business combinations are prohibited unless:
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the
board of directors of the corporation approved of the business combination
before the interested shareholder became an interested
shareholder;
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a
majority of shares not beneficially owned by the interested shareholder
approved the combination; and
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certain
transactional requirements are met.
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Covered
business combinations are prohibited for two years after an interested
shareholder becomes interested unless the board of directors of the corporation
approved of the business combination before the interested party became
interested.
Both
DeKalb and First Community are subject to the business combination provisions
of
the South Carolina statute.
At
the
special meeting, shareholders of DeKalb are being asked to consider and vote
on
a proposal to authorize management to adjourn the meeting to allow time for
the
further solicitation of proxies if there are insufficient votes present at
the
meeting, in person or by proxy, to approve the merger.
THE
BOARD OF DIRECTORS OF DEKALB RECOMMENDS A VOTE “FOR”
THE PROPOSAL TO AUTHORIZE MANAGEMENT TO ADJOURN THE SPECIAL MEETING OF
SHAREHOLDERS TO ALLOW TIME FOR THE FURTHER SOLICITATION OF PROXIES TO APPROVE
THE MERGER AGREEMENT.
DeKalb
is
a holding company for Bank of Camden. DeKalb was organized in March 2003, and
acquired Bank of Camden in September 2003. DeKalb currently engages in no
business other than ownership of Bank of Camden.
Bank
of
Camden conducts a general banking business under a state charter approved by
the
South Carolina State Board of Financial Institutions and granted by the
Secretary of State of South Carolina. Bank of Camden was originally organized
as
a South Carolina state bank in 2000 and commenced operations in February 2001.
Bank of Camden conducts its activities from its office located in Camden, South
Carolina.
Bank
of
Camden's business primarily consists of accepting deposits and making loans.
Bank of Camden seeks deposit accounts from households and businesses in its
primary market area by offering a full range of savings accounts, retirement
accounts (including Individual Retirement Accounts and Keogh plans), checking
accounts, money market accounts, and time certificates of deposit. It also
makes
primarily commercial, real estate and installment loans, primarily on a secured
basis, to borrowers in and around Kershaw County and makes other authorized
investments. Residential Mortgage loans are primarily made for resale in the
secondary market. As of December 31, 2005, Bank of Camden employed 14
persons.
Bank
of
Camden competes in the South Carolina county of Kershaw, for which the most
recent market share data available is as of June 30, 2005. At that time, eight
banks, and savings banks with 13 branch locations competed in Kershaw County
for
aggregate deposits of approximately $550,013,000. Bank of Camden had a
county-wide deposit market share of 5.10% and a market share rank of
seven.
Banks
generally compete with other financial institutions through the savings products
and services offered, the pricing of services, the level of service provided,
the convenience and availability of services, and the degree of expertise and
personal concern with which services are offered. In the conduct of certain
areas of its business, Bank of Camden competes with commercial banks, savings
and loan associations, credit unions, consumer finance companies, insurance
companies, money market mutual funds and other financial institutions, some
of
which are not subject to the same degree of regulation and restriction imposed
upon Bank of Camden. Many of these competitors have substantially greater
resources and lending limits than Bank of Camden and offer certain services,
such as international banking services and trust services, that Bank of Camden
does not provide. Moreover, most of these competitors have more branch offices
located throughout their market areas, a competitive advantage that Bank of
Camden does not have to the same degree.
The
banking industry is significantly affected by prevailing economic conditions
as
well as by government policies and regulations concerning, among other things,
monetary and fiscal affairs, the housing industry and financial institutions.
Deposits at banks are influenced by a number of economic factors, including
interest rates, competing instruments, levels of personal income and savings,
and the extent to which interest on retirement savings accounts is tax deferred.
Lending activities are also influenced by a number of economic factors,
including demand for and supply of housing, conditions in the construction
industry, and availability of funds. Primary sources of funds for lending
activities include savings deposits, income from investments, loan principal
repayments, and proceeds from sales of loans to conventional participating
lenders.
Bank
holding companies and banks are extensively regulated under federal and state
law. Most such regulations are intended to benefit depositors and other
customers of banks and not the shareholders of banks and bank holding companies.
To the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to such statutes and
regulations. Any change in applicable law or regulation may have a material
effect on the business of DeKalb and Bank of Camden.
General
As
a bank
holding company under the Bank Holding Company Act ("BHCA"), DeKalb is subject
to the regulations of the Board of Governors of the Federal Reserve System
(the
"Federal Reserve"). Under the BHCA, DeKalb's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any
other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
DeKalb may engage in a broader range of activities if it becomes a "financial
holding company" pursuant to the Gramm-Leach-Bliley Act, which is described
below under the caption "Gramm-Leach-Bliley Act." The BHCA prohibits DeKalb
from
acquiring direct or indirect control of more than 5% of the outstanding voting
stock or substantially all of the assets of any bank or from merging or
consolidating with another bank holding company without prior approval of the
Federal Reserve. Additionally, the BHCA prohibits DeKalb from engaging in or
from acquiring ownership or control of more than 5% of the outstanding voting
stock of any company engaged in a non-banking business unless such business
is
determined by the Federal Reserve to be so closely related to banking as to
be
properly incident thereto. The BHCA generally does not place territorial
restrictions on the activities of such non-banking related
activities.
DeKalb
is
also subject to regulation and supervision by the South Carolina State Board
of
Financial Institutions (the "State Board"). A South Carolina bank holding
company must provide the State Board with information with respect to the
financial condition, operations, management and inter-company relationships
of
the holding company and its subsidiaries. The State Board also may require
such
other information as is necessary to keep itself informed about whether the
provisions of South Carolina law and the regulations and orders issued
thereunder by the State Board have been complied with, and the State Board
may
examine any bank holding company and its subsidiaries.
Obligations
of DeKalb to its Subsidiary Bank
A
number
of obligations and restrictions are imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event the
depository institution is in danger of becoming insolvent or is insolvent.
For
example, under the policy of the Federal Reserve, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either
the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates)
of
the commonly controlled insured depository institutions.
The
FDIA
also provides that amounts received from the liquidation or other resolution
of
any insured depository institution by any receiver must be distributed (after
payment of secured claims) to pay the deposit liabilities of the institution
prior to payment of any other general or unsecured senior liability,
subordinated liability, general creditor or shareholder. This provision would
give depositors a preference over general and subordinated creditors and
shareholders in the event a receiver is appointed to distribute the assets
of
Bank of Camden.
Any
capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness
of
such subsidiary bank. In the event of a bank holding company's bankruptcy,
any
commitment by a bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Capital
Adequacy Guidelines for Bank Holding Companies and State Banks
The
various federal bank regulators, including the Federal Reserve and the FDIC
have
adopted risk-based and leverage capital adequacy guidelines for assessing bank
holding company and bank capital adequacy. These standards define what qualifies
as capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks.
Failure
to meet capital guidelines could subject Bank of Camden to a variety of
enforcement remedies, including prohibitions on various activities and, in
some
cases, the appointment of a receiver for Bank of Camden.
The
risk-based capital standards of both the Federal Reserve Board and the FDIC
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines
also
provide that an institution's exposure to a decline in the economic value of
its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve Board also
has recently issued additional capital guidelines for bank holding companies
that engage in certain trading activities.
Bank
of
Camden exceeded all applicable capital requirements by a wide margin at December
31, 2005. For small holding companies, such as DeKalb, capital adequacy is
measured by the capital adequacy of the subsidiary bank.
Payment
of Dividends
DeKalb
is
a legal entity separate and distinct from its bank subsidiary. Most of the
revenues of DeKalb are expected to result from dividends paid to DeKalb by
Bank
of Camden. There are statutory and regulatory requirements applicable to the
payment of dividends by Bank of Camden as well as by DeKalb to its shareholders.
It is not anticipated that DeKalb will pay cash dividends in the near
future.
Certain
Transactions by DeKalb with its Affiliates
Federal
law regulates transactions among a bank holding company and its affiliates,
including the amount of its bank's loans to or investments in nonbank affiliates
and the amount of advances to third parties collateralized by securities of
an
affiliate. Further, a bank holding company and its affiliates are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of
credit, lease or sale of property or furnishing of services.
FDIC
Insurance Assessments
Because
Bank of Camden's deposits are insured by the BIF, Bank of Camden is subject
to
insurance assessments imposed by the FDIC. Currently, the assessments imposed
on
all FDIC deposits for deposit insurance have an effective rate ranging from
0 to
27 basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. In addition, Bank of Camden
is
subject to an assessment to pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"). The FICO assessment
is
adjusted quarterly to reflect changes in the assessment bases of the respective
funds based on quarterly Call Report and Thrift Financial Report submissions.
The Federal Deposit Insurance Reform Act of 2005 will change the manner and
amount of insurance assessments beginning in 2006. The changes are not expected
to have a material effect on Bank of Camden in 2006.
Regulation
of Bank of Camden
Bank
of
Camden is subject to regulation and examination by FDIC and the State Board.
In
addition, Bank of Camden is subject to various other state and federal laws
and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit laws and laws relating to branch banking. Bank of Camden's loan
operations are also subject to certain federal consumer credit laws and
regulations promulgated thereunder, including, but not limited to: the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions
to
provide certain information concerning their mortgage lending; the
Equal
Credit Opportunity Act and the Fair Housing Act, prohibiting discrimination
on
the basis of certain prohibited factors in extending credit; the Fair Credit
Reporting Act, governing the use and provision of information to credit
reporting agencies; the Bank Secrecy Act, dealing with, among other things,
the
reporting of certain currency transactions; and the Fair Debt Collection Act,
governing the manner in which consumer debts may be collected by collection
agencies. The deposit operations of Bank of Camden are also subject to the
Truth
in Savings Act, requiring certain disclosures about rates paid on savings
accounts; the Expedited Funds Availability Act, which deals with disclosure
of
the availability of funds deposited in accounts and the collection and return
of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern 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.
Bank
of
Camden is also subject to the requirements of the Community Reinvestment Act
(the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe
and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Safety
and Soundness Regulations
Prompt
Corrective Action. The federal banking agencies have broad powers under current
federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized."
A
bank
that is "undercapitalized" becomes subject to provisions of the FDIA:
restricting payment of capital distributions and management fees; requiring
the
FDIC to monitor the condition of the bank; requiring submission by the bank
of a
capital restoration plan; prohibiting the acceptance of employee benefit plan
deposits; restricting the growth of the bank's assets and requiring prior
approval of certain expansion proposals. A bank that is "significantly
undercapitalized" is also subject to restrictions on compensation paid to senior
management of the bank, and a bank that is "critically undercapitalized" is
further subject to restrictions on the activities of the bank and restrictions
on payments of subordinated debt of the bank. The purpose of these provisions
is
to require banks with less than adequate capital to act quickly to restore
their
capital and to have the FDIC move promptly to take over banks that are unwilling
or unable to take such steps.
Brokered
Deposits. Under current FDIC regulations, "well capitalized" banks may accept
brokered deposits without restriction, "adequately capitalized" banks may accept
brokered deposits with a waiver from the FDIC (subject to certain restrictions
on payment of rates), while "undercapitalized" banks may not accept brokered
deposits. The regulations provide that the definitions of "well capitalized",
"adequately capitalized" and "undercapitalized" are the same as the definitions
adopted by the agencies to implement the prompt corrective action provisions
described in the previous paragraph.
Interstate
Banking
Under
the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, DeKalb
and
any other adequately capitalized bank holding company located in South Carolina
can acquire a bank located in any other state, and a bank holding company
located outside South Carolina can acquire any South Carolina-based bank, in
either case subject to certain deposit percentage and other restrictions. Unless
prohibited by state law, adequately capitalized and managed bank holding
companies are permitted to consolidate their multistate bank operations into
a
single bank subsidiary and to branch interstate through acquisitions. De novo
branching by an out-of-state bank is permitted only if the laws of the host
state expressly permit it. The authority of a bank to establish and operate
branches within a state continue to be subject to applicable state branching
laws. South Carolina law was amended, effective July 1, 1996, to permit such
interstate branching but not de novo branching by an out-of-state
bank.
Gramm-Leach-Bliley
Act
The
Gramm-Leach-Bliley Act, which makes it easier for affiliations between banks,
securities firms and insurance companies to take place, became effective in
March 2000. The Act removes Depression-era barriers that had separated banks
and
securities firms, and seeks to protect the privacy of consumers' financial
information. Most of the provisions of the Act require the applicable regulators
to adopt regulations in order to implement these provisions.
Under
provisions of the legislation and regulations adopted by the appropriate
regulators, banks, securities firms and insurance companies are able to
structure new affiliations through a holding company structure or through a
financial subsidiary. The legislation creates a new type of bank holding company
called a "financial holding company" which has powers much more extensive than
those of standard holding companies. These expanded powers include authority
to
engage in "financial activities," which are activities that are (1) financial
in
nature; (2) incidental to activities that are financial in nature; or (3)
complementary to a financial activity and that do not impose a safety and
soundness risk. Significantly, the permitted financial activities for financial
holding companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company
can
qualify as a financial holding company and expand the services it offers only
if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The
legislation also creates another new type of entity called a "financial
subsidiary." A financial subsidiary may be used by a national bank or a group
of
national banks to engage in many of the same activities permitted for a
financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate
to
protect it from financial and operational risks created both by itself and
by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary
and
to prevent each from becoming liable for the obligations of the
other.
The
Act
also establishes the concept of "functional supervision," meaning that similar
activities should be regulated by the same regulator. Accordingly, the Act
spells out the regulatory authority of the bank regulatory agencies, the
Securities and Exchange Commission and state insurance regulators so that each
type of activity is supervised by a regulator with corresponding expertise.
The
Federal Reserve Board is intended to be an umbrella supervisor with the
authority to require a bank holding company or financial holding company or
any
subsidiary of either to file reports as to its financial condition, risk
management systems, transactions with depository institution subsidiaries and
affiliates, and compliance with any federal law that it has authority to
enforce.
Although
the Act reaffirms that states are the regulators for insurance activities of
all
persons, including federally-chartered banks, the Act prohibits states from
preventing depository institutions and their affiliates from conducting
insurance activities.
The
Act
also establishes a minimum federal standard of privacy to protect the
confidentiality of a consumer's personal financial information and gives the
consumer the power to choose how personal financial information may be used
by
financial institutions. The privacy provisions of the Act have been implemented
by adoption of regulations by various federal agencies.
The
Act
and the regulations create opportunities for DeKalb to offer expanded services
to customers in the future, though DeKalb has not yet determined what the nature
of the expanded services might be or when the Company might find it feasible
to
offer them. The Act has increased competition from larger financial institutions
that are currently more capable than DeKalb of taking advantage of the
opportunity to provide a broader range of services. However, DeKalb continues
to
believe that its commitment to providing high quality, personalized service
to
customers will permit it to remain competitive in its market area.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act became effective in 2002, and mandated extensive reforms
and
requirements for public companies. The Sarbanes-Oxley Act and the SEC's new
regulations have increased DeKalb's cost of doing business, particularly its
fees for internal and external audit services and legal services, and the law
and regulations are expected to continue to do so. However, DeKalb does not
believe that it will be affected by Sarbanes-Oxley and the new SEC regulations
in ways that are materially different or more onerous than those of other public
companies of similar size and in similar businesses.
Legislative
Proposals
Proposed
legislation which could significantly affect the business of banking is
introduced in Congress and the General Assembly of South Carolina from time
to
time. Management of DeKalb cannot predict the future course of such legislative
proposals or their impact on DeKalb and Bank of Camden should they be
adopted.
Fiscal
and Monetary Policy
Banking
is a business which depends to a large extent on interest rate differentials.
In
general, the difference between the interest paid by a bank on its deposits
and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of DeKalb and Bank of Camden are subject to the
influence of economic conditions generally, both domestic and foreign, and
also
to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve regulates the supply
of
money through various means, including open market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and timing
of any changes in such policies and their impact on DeKalb and the Bank cannot
be predicted.
Bank
of
Camden owns its office at 631 West DeKalb Street, Camden, South Carolina. The
office is an approximately 11,000 square foot one story banking office with
on
site parking and drive through windows. Bank of Camden's property is believed
to
be well suited for its needs.
DeKalb
is
not a party to any legal proceedings other than routine collection
matters.
Although
DeKalb's common stock is traded from time to time on an individual basis, no
established trading market has developed and none is expected to develop in
the
foreseeable future. DeKalb's common stock is not traded on the NASDAQ National
Market System, nor are there any market makers known to management. During
2005,
management is aware of a few transactions in which DeKalb’s common stock traded
in the price range of $11.00 to $12.00 per share. However, management has not
ascertained that these transactions are the result of arm's length negotiations
between the parties, and because of the limited number of shares involved,
these
prices may not be indicative of the market value of DeKalb's common
stock.
As
of
December 31, 2005, there were approximately 593 holders of record of DeKalb's
common stock, excluding individual participants in security position
listings.
DeKalb
has never paid any cash dividends, and to support its continued capital growth,
does not expect to pay cash dividends in the near future. The dividend policy
of
DeKalb is subject to the discretion of its board of directors and depends upon
a
number of factors, including earnings, financial conditions, cash needs, and
general business conditions, as well as applicable regulatory considerations.
DeKalb's only source of dividends at this time is dividends paid to it by Bank
of Camden. South Carolina banking regulations restrict the amount of
cash
dividends
that can be paid to shareholders, and all of Bank of Camden's cash dividends
to
shareholders are subject to the prior approval of the South Carolina
Commissioner of Banking.
During
the fiscal year ended December 31, 2005, DeKalb did not sell any securities
that
were not registered under the Securities Act of 1933.
Neither
DeKalb nor any "affiliated purchaser" as defined in 17 C.F.R. 240.10b-18(a)(3)
purchased any shares or units of any class of DeKalb's equity securities that
is
registered pursuant to Section 12 of the Exchange Act during the fourth quarter
of 2005. Accordingly, no disclosure is required pursuant to 17 C.F.R. Section
228.703.
The
following table sets forth aggregated information about all of DeKalb’s
compensation plans (including individual compensation arrangements) under which
equity securities of DeKalb are authorized for issuance as of December 31,
2005:
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
(excluding
securities
reflected
in column (a))
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
88,000
|
|
$
|
10.78
|
|
|
10,921
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
|
¾
|
|
|
¾
|
|
Total
|
|
|
88,000
|
|
$
|
10.78
|
|
|
10,921
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
DeKalb
Bankshares, Inc.
Camden,
South Carolina
We
have
audited the accompanying consolidated balance sheets of DeKalb Bankshares,
Inc.
(DeKalb) and subsidiary as of December 31, 2005 and 2004, and the related
consolidated statements of income, changes in shareholders’ equity and
comprehensive income (loss), and cash flows for the years then ended. These
consolidated financial statements are the responsibility of DeKalb's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
consolidated 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 the significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We believe
that
our audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements present fairly, in all material
respects, the consolidated financial position of DeKalb Bankshares, Inc. and
subsidiary as of December 31, 2005 and 2004, and the results of their operations
and cash flows for each of the years in the two year period ended December
31,
2005, in conformity with accounting principles generally accepted in the United
States of America.
/s/
Elliott Davis, LLC
Elliott
Davis, LLC
Columbia,
South Carolina
January
19, 2006
DEKALB
BANKSHARES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
589,136
|
|
$
|
567,773
|
|
Federal
funds sold
|
|
|
1,330,000
|
|
|
3,175,000
|
|
Securities
purchased under
|
|
|
|
|
|
|
|
agreements to resell
|
|
|
501,576
|
|
|
-
|
|
Other
interest bearing deposits
|
|
|
51,826
|
|
|
61,793
|
|
Total
cash and cash equivalents
|
|
|
2,472,538
|
|
|
3,804,566
|
|
Time
deposits with other banks
|
|
|
-
|
|
|
313,494
|
|
Investment
securities:
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
11,031,973
|
|
|
9,594,385
|
|
Nonmarketable
equity securities
|
|
|
576,695
|
|
|
474,813
|
|
Total investment securities
|
|
|
11,608,668
|
|
|
10,069,198
|
|
Loans
held for sale
|
|
|
626,223
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
|
29,905,856
|
|
|
26,643,037
|
|
Less
allowance for loan losses
|
|
|
(305,000
|
)
|
|
(266,478
|
)
|
|
|
|
|
|
|
|
|
Loans,
net
|
|
|
29,600,856
|
|
|
26,376,559
|
|
Premises
and equipment, net
|
|
|
1,344,362
|
|
|
1,411,412
|
|
Accrued
interest receivable
|
|
|
194,422
|
|
|
150,875
|
|
Other
assets
|
|
|
479,183
|
|
|
433,673
|
|
Total
assets
|
|
|
46,326,252
|
|
|
42,559,777
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Noninterest-bearing
transaction accounts
|
|
$
|
2,979,405
|
|
$
|
2,788,768
|
|
Interest-bearing
transaction accounts
|
|
|
4,177,455
|
|
|
3,449,845
|
|
Savings
|
|
|
3,135,976
|
|
|
3,812,952
|
|
Time
deposits $100,000 and over
|
|
|
14,249,513
|
|
|
12,771,447
|
|
Other
time deposits
|
|
|
5,758,276
|
|
|
5,487,366
|
|
Total
deposits
|
|
|
30,300,625
|
|
|
28,310,378
|
|
Securities
sold under agreements to repurchase
|
|
|
3,000,000
|
|
|
3,000,000
|
|
Advances
from the Federal Home Loan Bank
|
|
|
7,600,000
|
|
|
5,900,000
|
|
Accrued
interest payable
|
|
|
204,556
|
|
|
120,117
|
|
Other
liabilities
|
|
|
63,544
|
|
|
36,887
|
|
Total
liabilities
|
|
|
41,168,725
|
|
|
37,367,382
|
|
Commitments
and contingencies (Notes 1, 13, and 14)
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, no par value; 20,000,000 shares authorized;
|
|
|
|
|
|
|
|
610,139
shares issued and outstanding
|
|
|
5,877,597
|
|
|
5,877,597
|
|
Retained
deficit
|
|
|
(538,897
|
)
|
|
(644,608
|
)
|
Accumulated
other comprehensive loss
|
|
|
(181,173
|
)
|
|
(40,594
|
)
|
Total shareholders’ equity
|
|
|
5,157,527
|
|
|
5,192,395
|
|
Total liabilities and shareholders’ equity
|
|
$
|
46,326,252
|
|
$
|
42,559,777
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DEKALB
BANKSHARES, INC. AND SUBSIDIARY
Consolidated
Statements of Income
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Interest
income:
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
1,959,542
|
|
$
|
1,584,586
|
|
Investment
securities:
|
|
|
|
|
|
|
|
Taxable
|
|
|
401,067
|
|
|
347,763
|
|
Other
interest and dividends
|
|
|
19,684
|
|
|
11,890
|
|
Federal
funds sold
|
|
|
51,464
|
|
|
26,156
|
|
Securities
purchased under
|
|
|
|
|
|
|
|
agreements to resell
|
|
|
1,576
|
|
|
-
|
|
Time
deposits with other banks
|
|
|
2,567
|
|
|
6,665
|
|
Total
interest income
|
|
|
2,435,900
|
|
|
1,977,060
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
Time
deposits $100,000 and over
|
|
|
381,158
|
|
|
210,130
|
|
Other
deposits
|
|
|
230,534
|
|
|
173,440
|
|
Other
interest expense
|
|
|
324,487
|
|
|
192,520
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
936,179
|
|
|
576,090
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
1,499,721
|
|
|
1,400,970
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
58,120
|
|
|
109,000
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
|
1,441,601
|
|
|
1,291,970
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
149,199
|
|
|
156,178
|
|
Gains
on residential mortgage loan sales
|
|
|
205,022
|
|
|
38,692
|
|
Other
service charges, commissions, and fees
|
|
|
38,669
|
|
|
29,586
|
|
Total
noninterest income
|
|
|
392,890
|
|
|
224,456
|
|
Noninterest
expenses:
|
|
|
|
|
|
|
|
Salaries
and
employee benefits
|
|
|
903,485
|
|
|
705,553
|
|
Net
occupancy
|
|
|
83,432
|
|
|
76,336
|
|
Furniture
and
equipment
|
|
|
51,665
|
|
|
47,268
|
|
Other
operating
|
|
|
610,703
|
|
|
547,395
|
|
|
|
|
|
|
|
|
|
Total
noninterest expenses
|
|
|
1,649,285
|
|
|
1,376,552
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
185,206
|
|
|
139,874
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
79,495
|
|
|
52,153
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
105,711
|
|
$
|
87,721
|
|
|
|
|
|
|
|
|
|
Income
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
0.17
|
|
$
|
0.14
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DEKALB
BANKSHARES, INC. AND SUBSIDIARY
Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income
(Loss)
Years
ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Retained
|
|
other
|
|
|
|
|
|
Common
Stock
|
|
earnings
|
|
comprehensive
|
|
|
|
|
|
Shares
|
|
Amount
|
|
(deficit)
|
|
income
(loss)
|
|
Total
|
|
Balance,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
2003
|
|
|
609,060
|
|
$
|
5,866,807
|
|
|
($732,329
|
)
|
|
($22,632
|
)
|
$
|
5,111,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
87,721
|
|
|
|
|
|
87,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$10,549
|
|
|
|
|
|
|
|
|
|
|
|
(17,962
|
)
|
|
(17,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
stock options
|
|
|
1,079
|
|
|
10,790
|
|
|
|
|
|
|
|
|
10,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
610,139
|
|
|
5,877,597
|
|
|
(644,608
|
)
|
|
(40,594
|
)
|
|
5,192,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
105,711
|
|
|
|
|
|
105,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$82,563
|
|
|
|
|
|
|
|
|
|
|
|
(140,579
|
)
|
|
(140,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
2005
|
|
|
610,139
|
|
$
|
5,877,597
|
|
|
($538,897
|
)
|
|
($181,173
|
)
|
$
|
5,157,527
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DEKALB
BANKSHARES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
105,711
|
|
$
|
87,721
|
|
Adjustments
to
reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by
operating activities:
|
|
|
|
|
|
|
|
Provision
for
loan losses
|
|
|
58,120
|
|
|
109,000
|
|
Depreciation
and amortization expense
|
|
|
120,917
|
|
|
119,618
|
|
Gain
on
sale of premises and equipment
|
|
|
(1,274
|
)
|
|
-
|
|
Accretion
and
premium amortization
|
|
|
16,411
|
|
|
17,548
|
|
Deferred
income
tax provision
|
|
|
61,359
|
|
|
52,359
|
|
Proceeds
from
sales of residential mortgages
|
|
|
12,930,382
|
|
|
2,647,850
|
|
Disbursements
for residential mortgages held-for-sale
|
|
|
(13,556,605
|
)
|
|
(2,527,850
|
)
|
Increase
in
interest receivable
|
|
|
(43,547
|
)
|
|
(39,058
|
)
|
Increase
in
interest payable
|
|
|
84,439
|
|
|
82,324
|
|
Increase
in
other assets
|
|
|
(24,306
|
)
|
|
(28,177
|
)
|
Increase
(decrease) in other liabilities
|
|
|
26,657
|
|
|
(2,349
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by operating activities
|
|
|
(221,736
|
)
|
|
518,986
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Net
increase in loans made to customers
|
|
|
(3,282,418
|
)
|
|
(5,286,410
|
)
|
Purchases
of
securities available-for-sale
|
|
|
(3,515,070
|
)
|
|
(6,576,919
|
)
|
Maturities,
calls and paydowns of securities available-for-sale
|
|
|
1,837,929
|
|
|
3,875,107
|
|
Purchases
of
premises and equipment
|
|
|
(64,993
|
)
|
|
(112,290
|
)
|
Proceeds
received from sales of premises and equipment
|
|
|
12,400
|
|
|
-
|
|
Redemption
(purchases) of time deposits with other banks
|
|
|
313,494
|
|
|
(3,416
|
)
|
Purchases
of
nonmarketable equity securities
|
|
|
(101,881
|
)
|
|
(503,713
|
)
|
Proceeds
from
sales of nonmarketable equity securities
|
|
|
-
|
|
|
248,900
|
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
(4,800,539 |
) |
|
(8,358,741 |
) |
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from
exercise of stock options
|
|
|
-
|
|
|
10,790
|
|
Net
increase in demand deposits, interest-bearing
|
|
|
|
|
|
|
|
transaction
accounts and savings accounts
|
|
|
241,271
|
|
|
1,133,547
|
|
Net
increase in certificates of deposit and other
|
|
|
|
|
|
|
|
time
deposits
|
|
|
1,748,976
|
|
|
3,330,289
|
|
Increase
in
advances from Federal Home Loan Bank
|
|
|
1,700,000
|
|
|
1,900,000
|
|
Increase
in
securities sold under agreements to repurchase
|
|
|
-
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
3,690,247
|
|
|
9,374,626
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,332,028
|
)
|
|
1,534,871
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
3,804,566
|
|
|
2,269,695
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
2,472,538
|
|
$
|
3,804,566
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
851,740
|
|
$
|
493,766
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
5,536
|
|
$
|
3,177
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
NOTE
1 - PENDING MERGER WITH FIRST COMMUNITY CORPORATION
On
January 19, 2006, DeKalb Bankshares, Inc. (“DeKalb”) entered into an agreement
and plan of merger with First Community Corporation (“First Community”), the
parent holding company for First Community Bank in Lexington, South Carolina.
Pursuant to the agreement, DeKalb will be merged with and into First Community
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 First Community common stock. The boards of
directors of both companies have approved the merger agreement. The agreement
is
subject to the approval of shareholders of DeKalb and regulatory authorities.
The transaction is expected to close during the late second or early third
quarter of 2006.
NOTE
2 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Consolidation -
DeKalb
was incorporated to serve as a bank holding company for its subsidiary, Bank
of
Camden. Bank of Camden was incorporated on February 14, 2001 and commenced
business on February 20, 2001. The principal business activity of Bank of Camden
is to provide commercial banking services to domestic markets, principally
in
Kershaw County, South Carolina. Bank of Camden is a state-chartered bank, and
its deposits are insured by the Federal Deposit Insurance Corporation. The
consolidated financial statements include the accounts of the parent company
and
its wholly-owned subsidiary after elimination of all significant intercompany
balances and transactions.
Management’s
Estimates
- The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material
estimates that are particularly susceptible to significant change relate to
the
determination of the allowance for losses on loans, including valuation
allowances for impaired loans, and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with
the
determination of the allowances for losses on loans and foreclosed real estate,
management obtains independent appraisals for significant properties. Management
must also make estimates in determining the estimated useful lives and methods
for depreciating premises and equipment.
While
management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review Bank
of
Camden’s allowances for losses on loans and foreclosed real estate. Such
agencies may require Bank of Camden to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible that
the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
Significant
Group Concentrations of Credit Risk
-
Financial instruments, which potentially subject DeKalb to concentrations of
credit risk, consist principally of loans receivable, investment securities,
federal funds sold and amounts due from banks.
DeKalb
makes loans to individuals and small businesses for various personal and
commercial purposes primarily in Kershaw County, South Carolina. DeKalb's loan
portfolio is not concentrated in loans to any single borrower or a relatively
small number of borrowers. Additionally, management is not aware of any
concentrations of loans to classes of borrowers or industries that would be
similarly affected by economic conditions except for loans secured by
residential 1-4 family dwellings and non-farm, non-residential real estate.
These concentrations of 1-4 family dwelling loans and non-farm non-residential
real estate loans totaled $9,661,018 and $9,320,210, respectively, at December
31, 2005, representing 186% and 180%, respectively, of total equity and 33%
and
31%, respectively, of net loans receivable. At December 31, 2004, these
concentrations totaled $10,029,077 and $7,699,603, respectively, representing
193% and 148%, respectively, of total equity and 38% and 29%, respectively,
of
net loans receivable.
NOTE
2 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-
continued
such
as
loans that subject borrowers to substantial payment increases (e.g., principal
deferral periods, loans with initial interest-only periods, etc.) and loans
with
high loan-to-value ratios. Management has determined that there is no
concentration of credit risk associated with its lending policies or practices.
Additionally, there are industry practices that could subject DeKalb to
increased credit risk should economic conditions change over the course of
a
loan's life. For example, DeKalb makes variable rate loans and fixed rate
principal-amortizing loans with maturities prior to the loan being fully paid
(i.e., balloon payment loans). These loans are underwritten and monitored to
manage the associated risks. Therefore, management believes that these
particular practices do not subject DeKalb to unusual credit risk.
DeKalb's
investment portfolio consists principally of obligations of the United States,
its agencies or its corporations and mortgage backed securities. In the opinion
of Management, there is no concentration of credit risk in its investment
portfolio. DeKalb places its deposits and correspondent accounts with and sells
its federal funds to high quality institutions. Management believes credit
risk
associated with correspondent accounts is not significant.
Securities
Available-for-Sale
-
Securities available-for-sale are carried at amortized cost and adjusted to
estimated market value by recognizing the aggregate unrealized gains or losses
in a valuation account. Aggregate market valuation adjustments are recorded
in
stockholders’ equity net of deferred income taxes. Reductions in market value
considered by management to be other than temporary are reported as a realized
loss and a reduction in the cost basis of the security. The adjusted cost basis
of investments available-for-sale is determined by specific identification
and
is used in computing the gain or loss upon sale.
Nonmarketable
Equity Securities
-
Nonmarketable equity securities include the cost of DeKalb’s investment in stock
of the Federal Home Loan Bank and Community Financial Services, Inc. The stocks
have no quoted market value and no ready market for them exists. Investment
in
the Federal Home Loan Bank is a condition of borrowing from the Federal Home
Loan Bank, and the stock is pledged to collateralize such borrowings. At
December 31, 2005 and 2004, Bank of Camden’s investment in Federal Home Loan
Bank stock was $427,200 and $331,600, respectively. At December 31, 2005 and
2004, investment in Community Financial Services, Inc. was $149,495 and 143,213,
respectively. Dividends received on these stocks are included as a separate
component of interest income.
Loans
- Loans
are stated at their unpaid principal balance. Interest income is computed using
the simple interest method and is recorded in the period earned.
When
serious doubt exists as to the collectibility of a loan, interest income is
generally discontinued unless the estimated net realizable value of collateral
exceeds the principal balance and accrued interest.
Impaired
loans are measured based on the present value of discounted expected cash flows.
When it is determined that a loan is impaired, a direct charge to bad debt
expense is made for the difference between the net present value of expected
future cash flows based on the contractual rate and discount rate and DeKalb's
recorded investment in the related loan. The corresponding entry is to a related
allowance account. The accrual of interest is discontinued on impaired loans
when management determines that a borrower may be unable to meet payments as
they become due. Subsequent interest earned is recognized only to the point
that
cash payments are received. All payments are applied to principal if the
ultimate amount of principal is not expected to be collected.
Allowance
for Loan Losses
- An
allowance for loan losses is maintained at a level deemed appropriate by
management to provide adequately for known and inherent losses in the loan
portfolio. The allowance is based upon a continuing review of past loan loss
experience, current and future economic conditions which may affect the
borrowers’ ability to pay, and the underlying collateral value of the loans.
Loans deemed uncollectible are charged off and deducted from the allowance.
The
provision for loan losses and recoveries of loans previously charged off are
added to the allowance.
Residential
Mortgage Loans Held-for-Sale
-
DeKalb's residential mortgage lending activities for sale in the secondary
market are comprised of accepting residential mortgage loan applications,
qualifying borrowers to standards established by investors, funding residential
mortgage loans and selling mortgage loans to investors under pre-existing
commitments. Funded residential mortgages held temporarily for sale to investors
are recorded at the lower of cost or market value. Application and origination
fees collected by DeKalb are recognized as income upon sale to the
investor.
NOTE
2 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-
continued
Premises
and Equipment
-
Premises and equipment are stated at cost, less accumulated depreciation. The
provision for depreciation is computed by the straight-line method, based on
the
estimated useful lives for buildings of 40 years and furniture and equipment
of
5 to 10 years. The cost of assets sold or otherwise disposed of, and the related
allowance for depreciation, is eliminated from the accounts and the resulting
gains or losses are reflected in the income statement when incurred. Maintenance
and repairs are charged to current expense. The costs of major renewals and
improvements are capitalized.
Securities
Sold Under Agreements to Repurchase
- Bank
of Camden enters into sales of securities under agreements to repurchase.
Fixed-coupon repurchase agreements are treated as financing, with the obligation
to repurchase securities sold being reflected as a liability and the securities
underlying the agreements remaining as assets.
Income
Taxes
- Income
taxes are the sum of amounts currently payable to taxing authorities, and the
net changes in income taxes payable or refundable in future years. Income taxes
deferred to future years are determined utilizing a liability approach. This
method gives consideration to the future tax consequences associated with
differences between financial accounting and tax bases of certain assets and
liabilities, which are principally the allowance for loan losses and depreciable
premises and equipment.
Advertising
Expense
-
Advertising and public relations costs are generally expensed as incurred.
External costs incurred in producing media advertising are expensed the first
time the advertising takes place. External costs relating to direct mailing
costs are expensed in the period in which the direct mailings are sent.
Advertising and public relations costs of $27,150 and $36,637 were included
in
DeKalb's results of operations for 2005 and 2004, respectively.
Retirement
Plan
- DeKalb
has a SIMPLE retirement plan covering substantially all employees. Under the
plan, participants were permitted to make discretionary contributions in 2005
up
to $10,000, unless age 50 and over, as to which the amount is $12,000. DeKalb
can match employee contributions by contributing up to 3% of each employee’s
annual compensation. DeKalb matched contributions in 2005 and 2004 and charges
to earnings were $14,987 and $3,972, respectively.
Stock-Based
Compensation
- DeKalb
has a stock-based employee compensation plan which is further described in
Note
16. DeKalb accounts for the plan under the recognition and measurement
principles of Accounting Principles Board (“APB”) Opinion No. 25, "Accounting
for Stock Issued to Employees",
and
related Interpretations. No stock-based employee compensation cost is reflected
in the net income, as all stock options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the date
of
grant. The following table illustrates the effect on net income and earnings
per
common share as if DeKalb had applied the fair value recognition provisions
of
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards (“SFAS”) No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation for the years ended December 31, 2005 and
2004.
|
|
2005
|
|
2004
|
|
Net
income, as reported
|
|
$
|
105,711
|
|
$
|
87,721
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
|
|
|
compensation
expense determined
|
|
|
|
|
|
|
|
under
fair value based method
|
|
|
|
|
|
|
|
for
all
awards, net of related tax effects
|
|
|
83,735
|
|
|
7,858
|
|
|
|
|
|
|
|
|
|
Pro
forma net income
|
|
$
|
21,976
|
|
$
|
79,863
|
|
|
|
|
|
|
|
|
|
Income
per share:
|
|
|
|
|
|
|
|
Basic
-
as reported
|
|
$
|
0.17
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
Basic
-
pro forma
|
|
$
|
0.04
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.17
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
Diluted
- pro forma
|
|
$
|
0.04
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
NOTE
2 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-
continued
Income
Per Common Share
- Basic
income per share represents income available to common shareholders divided
by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been issued. Potential
common shares that may be issued by DeKalb relate solely to outstanding stock
options and are determined using the treasury stock method.
Comprehensive
Income
-
Accounting principles generally require that recognized revenue, expenses,
gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income (loss).
The
components of other comprehensive loss and related tax effects for the years
ended December 31, 2005 and 2004 are as follows:
|
|
2005
|
|
2004
|
|
Unrealized
holding losses on securities available-for-sale
|
|
|
($223,142
|
)
|
|
($28,511
|
)
|
Reclassification
adjustment for losses realized in net income
|
|
|
-
|
|
|
-
|
|
Net
unrealized losses on securities available-for-sale
|
|
|
(223,142
|
)
|
|
(28,511
|
)
|
Tax
effect
|
|
|
82,563
|
|
|
10,549
|
|
Net-of-tax
amount
|
|
|
($140,579
|
)
|
|
($17,962
|
)
|
Statement
of Cash Flows
- For
purposes of reporting cash flows, DeKalb considers certain highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents include amounts due from banks and federal funds
sold.
Changes
in the valuation account of securities available-for-sale, including the
deferred tax effects, are considered noncash transactions for purposes of the
statements of cash flows and are presented in detail in the notes to the
financial statements.
Off-Balance-Sheet
Financial Instruments
- In the
ordinary course of business, DeKalb enters into off-balance-sheet financial
instruments consisting of commitments to extend credit and letters of credit.
These financial instruments are recorded in the financial statements when they
become payable by the customer.
Recent
Accounting Pronouncements
- The
following is a summary of recent authoritative pronouncements that affect
accounting, reporting, and disclosure of financial information by
DeKalb:
In
December 2004, the FASB issued 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 fiscal year
beginning after December 15, 2005. SFAS No. 123(R) allows for adoption using
either the modified prospective or modified retrospective methods. DeKalb
anticipates using the modified prospective method when this statement is adopted
in the first quarter of 2006. DeKalb has evaluated the impact upon adoption
of
SFAS No. 123(R) and has concluded that the adoption will not have a material
impact on its financial position or results of operations upon adoption.
NOTE
2 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-
continued
Recent
Accounting Pronouncements -
continued
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 in 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 DeKalb'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 DeKalb effective
December 31, 2003.
The
recognition and measurement guidance in paragraphs 6-20 of Issue No. 03-1 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
DeKalb) and will be effective for other-than-temporary impairment analysis
conducted in periods beginning after December 15, 2005. DeKalb 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
NOTE
2 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
-
continued
Recent
Accounting Pronouncements -
continued
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. DeKalb adopted this disclosure standard effective December
31, 2005.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
NOTE
3 - INVESTMENT SECURITIES
Securities
available-for-sale consisted of the following:
|
|
Amortized
|
|
Gross
Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair
Value
|
|
December
31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of
U.S. government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporations
|
|
$
|
3,996,122
|
|
$ |
-
|
|
$
|
64,747
|
|
$
|
3,931,375
|
|
Mortgage-backed
securities
|
|
|
7,323,427
|
|
|
-
|
|
|
222,829
|
|
|
7,100,598
|
|
Total
|
|
$
|
11,319,549
|
|
$ |
-
|
|
$
|
287,576
|
|
$
|
11,031,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of
U.S. government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporations
|
|
$
|
2,509,614
|
|
$
|
5,252
|
|
$
|
13,359
|
|
$
|
2,501,507
|
|
Mortgage-backed
securities
|
|
|
7,149,205
|
|
|
2,214
|
|
|
58,541
|
|
|
7,092,878
|
|
Total
|
|
$
|
9,658,819
|
|
$
|
7,466
|
|
$
|
71,900
|
|
$
|
9,594,385
|
|
The
following is a summary of maturities of securities available-for-sale. The
amortized cost and estimated fair values are based on the contractual maturity
dates. Actual maturities may differ from the contractual maturities because
borrowers may have the right to prepay obligations with or without penalty.
No
maturity schedule is presented for mortgage-backed securities since paydowns
are
expected before contractual maturity dates.
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
|
|
Cost
|
|
Fair
Value
|
|
Cost
|
|
Fair
Value
|
|
Due
within one year
|
|
$
|
750,000
|
|
$
|
736,563
|
|
$ |
-
|
|
$
|
-
|
|
Due
after one year but within five years
|
|
|
3,246,122
|
|
|
3,194,812
|
|
|
2,509,614
|
|
|
2,501,507
|
|
Mortgage-backed
securities
|
|
|
7,323,427
|
|
|
7,100,598
|
|
|
7,149,205
|
|
|
7,092,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,319,549
|
|
$
|
11,031,973
|
|
$
|
9,658,819
|
|
$
|
9,594,385
|
|
The
following table shows gross unrealized losses and fair value, aggregated by
investment category, and length of time that individual securities have been
in
a continuous unrealized loss position, at December 31, 2005.
NOTE
3 - INVESTMENT SECURITIES
Continued
Securities
Available for Sale
|
|
Less
than
|
|
Twelve
months
|
|
|
|
|
|
|
|
twelve
months
|
|
or
more
|
|
Total
|
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Fair
value
|
|
losses
|
|
Fair
value
|
|
losses
|
|
Fair
value
|
|
losses
|
|
Securities
of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government
agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporations
|
|
$
|
1,968,797
|
|
$
|
27,325
|
|
$
|
1,962,578
|
|
$
|
37,422
|
|
$
|
3,931,375
|
|
$
|
64,747
|
|
Mortgage-backed
securities
|
|
|
2,155,231
|
|
|
47,856
|
|
|
4,945,367
|
|
|
174,973
|
|
|
7,100,598
|
|
|
222,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,124,028
|
|
$
|
75,181
|
|
$
|
6,907,945
|
|
$
|
212,395
|
|
$
|
11,031,973
|
|
$
|
287,576
|
|
Securities
classified as available-for-sale are recorded at fair market value.
Approximately 73.9% of the unrealized losses, or fourteen individual securities,
consisted of securities in a continuous loss position for twelve months or
more.
DeKalb has the ability and intent to hold these securities until such time
as
the value recovers or the securities mature. DeKalb believes, based on industry
analyst reports and credit ratings, that the deterioration in value is
attributable to changes in market interest rates and is not in the credit
quality of the issuer and therefore, these losses are not considered
other-than-temporary.
At
December 31, 2005 and 2004, investment securities with a book value of
$11,214,823 and $9,556,897 and a market value of $10,929,354 and $9,491,412,
respectively, were pledged as collateral to secure public deposits and for
other
purposes as required or permitted by law.
NOTE
4 - LOANS RECEIVABLE
Loans
receivable consisted of the following:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Mortgage
loans on real estate:
|
|
|
|
|
|
|
|
Residential
1-4 family
|
|
$
|
9,661,018
|
|
$
|
10,029,077
|
|
Commercial
|
|
|
9,320,210
|
|
|
7,699,603
|
|
Construction
|
|
|
5,197,612
|
|
|
2,426,209
|
|
Second
mortgages
|
|
|
307,322
|
|
|
99,595
|
|
Equity
lines of credit
|
|
|
2,292,288
|
|
|
1,880,511
|
|
|
|
|
|
|
|
|
|
|
|
|
26,778,450
|
|
|
22,134,995
|
|
Commercial
and industrial
|
|
|
2,090,227
|
|
|
3,278,822
|
|
Consumer
and other
|
|
|
1,037,179
|
|
|
1,229,220
|
|
|
|
|
|
|
|
|
|
Total
gross loans
|
|
$
|
29,905,856
|
|
$
|
26,643,037
|
|
Transactions
in the allowance for loan losses for the years ended December 31, 2005 and
2004
are summarized below:
|
|
2005
|
|
2004
|
|
Balance,
beginning of year
|
|
$
|
266,478
|
|
$
|
305,000
|
|
Provision
charged to operations
|
|
|
58,120
|
|
|
109,000
|
|
Recoveries
on loans previously charged-off
|
|
|
1,067
|
|
|
5,184
|
|
Loans
charged-off
|
|
|
(20,665
|
)
|
|
(152,706
|
)
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$
|
305,000
|
|
$
|
266,478
|
|
There
were no loans in nonaccrual status, no loans past due ninety days or more and
still accruing interest and no restructured loans at December 31, 2005 and
2004,
respectively. DeKalb also had no loans that were considered to be impaired
at
December 31, 2005, and 2004.
NOTE
5 - PREMISES AND EQUIPMENT
Premises
and equipment consisted of the following:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Land
|
|
$
|
400,000
|
|
$
|
400,000
|
|
Land
improvements
|
|
|
102,474
|
|
|
102,474
|
|
Building
|
|
|
763,930
|
|
|
759,470
|
|
Furniture
and equipment
|
|
|
647,292
|
|
|
612,786
|
|
|
|
|
|
|
|
|
|
|
|
|
1,913,696
|
|
|
1,874,730
|
|
Less,
accumulated depreciation
|
|
|
(569,334
|
)
|
|
(463,318
|
)
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
$
|
1,344,362
|
|
$
|
1,411,412
|
|
Depreciation
expense for the years ended December 31, 2005 and 2004 was $120,917 and
$119,618, respectively.
NOTE
6 - DEPOSITS
At
December 31, 2005, the scheduled maturities of certificates of deposit were
as
follows:
|
|
Amount
|
|
|
|
|
|
2006
|
|
$
|
18,760,033
|
|
2007
|
|
|
910,124
|
|
2008
|
|
|
68,456
|
|
2009
|
|
|
269,176
|
|
|
|
$
|
20,007,789
|
|
NOTE
7 - SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Information
concerning securities sold under agreement to repurchase is summarized as
follows for the year ended December 31, 2005 and 2004:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Average
balance during the year
|
|
$
|
3,000,000
|
|
$
|
2,852,055
|
|
Average
interest rate during the year
|
|
|
2.95
|
%
|
|
2.95
|
%
|
Maximum
month-end balance during the year
|
|
$
|
3,000,000
|
|
$
|
3,000,000
|
|
The
agreement has a maturity date of January 20, 2007 and bears a fixed interest
rate of 2.95%. Mortgage-backed securities with a book value of $3,041,285 and
a
market value of $2,961,252 at December 31, 2005 are used as collateral for
the
agreement. Mortgage-backed securities with a book value of $3,106,649 and a
market value of $3,105,795 at December 31, 2004 were used as collateral for
the
agreement in 2004.
NOTE
8 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances
from the Federal Home Loan Bank consisted of the following:
|
|
|
|
December
31,
|
|
|
|
Interest
|
|
2005
|
|
2004
|
|
Description
|
|
Rate
|
|
Balance
|
|
Balance
|
|
Fixed
rate advances maturing:
|
|
|
|
|
|
|
|
|
|
|
|
August
26, 2005
|
|
|
2.47
|
%
|
|
$
|
-
|
|
$
|
1,000,000
|
|
September
6, 2011
|
|
|
3.23
|
|
|
|
-
|
|
|
500,000
|
|
July
23, 2012
|
|
|
3.87
|
|
|
|
1,000,000
|
|
|
1,000,000
|
|
July
22, 2015
|
|
|
3.79
|
|
|
|
2,000,000
|
|
|
-
|
|
Variable
rate advance maturing:
|
|
|
|
|
|
|
|
|
|
|
|
March
10, 2006
|
|
|
4.48
|
|
|
|
400,000
|
|
|
400,000
|
|
September
6, 2011
|
|
|
4.45
|
|
|
|
500,000
|
|
|
-
|
|
Daily
rate advance maturing:
|
|
|
|
|
|
|
|
|
|
|
|
November
1, 2005
|
|
|
2.44
|
|
|
|
-
|
|
|
3,000,000
|
|
November
1, 2006
|
|
|
4.44
|
|
|
|
3,700,000
|
|
|
-
|
|
|
|
|
|
|
|
$
|
7,600,000
|
|
$
|
5,900,000
|
|
Scheduled
maturities of Federal Home Loan Bank advances are as follows:
2006
|
|
$
|
4,100,000
|
|
|
After
five years
|
|
|
3,500,000
|
|
|
|
|
$
|
7,600,000
|
|
|
As
collateral, DeKalb has given a blanket lien on its first mortgage loans on
one
to four family residential loans aggregating $9,661,018, a blanket lien on
home
equity lines of credits and second mortgages aggregating $2,599,610 and a
blanket lien on commercial real estate loans aggregating $9,320,210, at December
31, 2005. In addition, DeKalb's Federal Home Loan Bank stock is pledged to
secure the borrowings. Certain advances are subject to prepayment penalties.
NOTE
9 - RESTRICTIONS ON DIVIDENDS
South
Carolina banking regulations restrict the payment of dividends to shareholders.
Bank of Camden is authorized to pay cash dividends up to 100% of net income
in
any calendar year without obtaining the prior approval of the Commissioner
of
Banking provided that Bank of Camden received a composite rating of one or
two
at the last Federal or State regulatory examination. Otherwise, Bank of Camden
must obtain prior approval to pay a dividend. Under Federal Reserve Board
regulations, the amounts of loans or advances from Bank of Camden to the parent
company are also restricted.
NOTE
10 - OTHER OPERATING EXPENSE
Other
operating expense for the years ended December 31, 2005 and 2004 is summarized
below:
|
|
2005
|
|
2004
|
|
Professional
fees
|
|
$
|
102,602
|
|
$
|
86,001
|
|
Printing
and office supplies
|
|
|
46,550
|
|
|
41,534
|
|
Advertising
and public relations
|
|
|
27,150
|
|
|
36,637
|
|
Data
processing
|
|
|
151,342
|
|
|
144,993
|
|
Insurance
|
|
|
19,893
|
|
|
25,925
|
|
ATM
expense
|
|
|
40,289
|
|
|
31,300
|
|
Other
|
|
|
222,877
|
|
|
181,005
|
|
|
|
$
|
610,703
|
|
$
|
547,395
|
|
NOTE
11 - INCOME TAXES
Income
tax expense (benefit) for the years ended December 31, 2005 and 2004 is
summarized as follows:
|
|
2005
|
|
2004
|
|
Current
portion
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
$
|
-
|
|
State
|
|
|
7,899
|
|
|
1,466
|
|
|
|
|
|
|
|
|
|
Total
current
|
|
|
7,899
|
|
|
1,466
|
|
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
|
(10,965
|
)
|
|
40,138
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$
|
(3,068
|
)
|
$
|
41,604
|
|
|
|
|
|
|
|
|
|
Income
taxes are allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To continuing operations
|
|
$
|
79,495
|
|
$
|
52,153
|
|
To shareholders’ equity
|
|
|
(82,563
|
)
|
|
(10,549
|
)
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$
|
(3,068
|
)
|
$
|
41,604
|
|
The
components of the net deferred tax asset were as follows:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$
|
91,579
|
|
$
|
82,069
|
|
Net
operating loss carryforward
|
|
|
164,588
|
|
|
219,774
|
|
Organization
costs
|
|
|
5,392
|
|
|
37,739
|
|
Unrealized
loss on securities available-for-sale
|
|
|
106,403
|
|
|
23,841
|
|
Other
|
|
|
4,262
|
|
|
2,499
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
372,224
|
|
|
365,922
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
11,599
|
|
|
16,262
|
|
|
|
|
|
|
|
|
|
Total
deferred tax liabilities
|
|
|
11,599
|
|
|
16,262
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
360,625
|
|
$
|
349,660
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets represent the future tax benefit of future deductible differences
and, if it is more likely than not that a tax asset will not be realized, a
valuation allowance is required to reduce the recorded deferred tax assets
to
net realizable value. Management has determined that it is more likely than
not
that the entire deferred tax asset at December 31, 2005 will be realized, and
accordingly, has not established a valuation allowance. Deferred tax assets
are
included in other assets.
DeKalb
has a net operating loss carryforward for income tax purposes of $478,775 as
of
December 31, 2005. This net operating loss expires in the year
2022.
A
reconciliation between the income tax expense and the amount computed by
applying the Federal statutory rate of 34% for the years ended December 31,
2005
and 2004 to income before income taxes follows:
|
|
2005
|
|
2004
|
|
Tax
expense at statutory rate
|
|
$
|
71,305
|
|
$
|
47,557
|
|
State
income tax, net of federal income tax effect
|
|
|
4,334
|
|
|
2,662
|
|
Other
|
|
|
3,856
|
|
|
1,934
|
|
Income
tax expense
|
|
$
|
79,495
|
|
$
|
52,153
|
|
NOTE
12 - RELATED PARTY TRANSACTIONS
Certain
parties (principally certain directors and executive officers of DeKalb, their
immediate families and business interests) were loan customers of and had other
transactions in the normal course of business with DeKalb. 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 do not involve more than the normal risk of
collectibility. As of December 31, 2005 and 2004, DeKalb had related party
loans
totaling $1,481,059 and $1,199,634, respectively. During 2005, $983,554 of
new
loans were made to related parties and repayments totaled $702,129.
DeKalb
leases office space to an attorney who is also a director. Rental income from
this director totaled $10,800 per year for the years ended December 31, 2005,
and 2004. This same director also serves as legal counsel to Bank of Camden.
The
amount paid to this director for legal services totaled $8,510 and $9,125 for
the years ended December 31, 2005 and 2004, respectively.
Deposits
from related parties held by Bank of Camden at December 31, 2005 and 2004
totaled $817,348 and $1,220,010, respectively.
NOTE
13 - COMMITMENTS AND CONTINGENCIES
In
the
ordinary course of business, DeKalb may, from time to time, become a party
to
legal claims and disputes. At December 31, 2005 management, after consultation
with legal counsel, is not aware of any pending or threatened litigation or
unasserted claims or assessments that could result in losses, if any, that
would
be material to the financial statements.
On
November 8, 2005 DeKalb engaged an investment banker for issues to related
to
the upcoming merger discussed in Note 1. Future expenses related to these
services are expected to be approximately $100,000.
NOTE
14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
DeKalb
is
a 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 and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheets. The contract
or notional amounts of those instruments reflect the extent of involvement
DeKalb has in particular classes of financial instruments. The fair market
value
of these instruments is not material to the consolidated financial
statements.
DeKalb's
exposure to credit loss in the event of nonperformance by the other party to
the
financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual or notional amount of those
instruments. DeKalb uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The fair
market value of these instruments is not material to the consolidated financial
statements.
Standby
letters of credit written are conditional commitments issued by DeKalb to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
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 payment
of a fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. DeKalb evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
DeKalb upon extension of credit is based on management’s credit evaluation of
the customer. Collateral held for
commitments
to extend credit and standby letters of credit varies but may include accounts
receivable, inventory, real or personal property, plant, equipment, and
income-producing commercial properties.
The
following table summarizes DeKalb's off-balance-sheet financial instruments
whose contract amounts represent credit risk:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Commitments
to
extend credit
|
|
$
|
5,450,916
|
|
$
|
4,897,326
|
|
Standby
letters of credit
|
|
|
83,030
|
|
|
83,030
|
|
Management
is not aware of any significant concentrations of loans to classes of borrowers
or industries that would be affected similarly by economic
conditions.
NOTE
15 - INCOME PER COMMON SHARE
Earnings
per share - basic is computed by dividing net income by the weighted average
number of common shares outstanding. Earnings per share - diluted is computed
by
dividing net income by the weighted average number of common shares outstanding
and dilutive common share equivalents using the treasury stock
method.
|
|
For
the years ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
105,711
|
|
$
|
87,721
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
610,139
|
|
|
609,358
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.17
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
105,711
|
|
$
|
87,721
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
610,139
|
|
|
609,358
|
|
|
|
|
|
|
|
|
|
Incremental
shares from assumed conversion
|
|
|
|
|
|
|
|
of
stock options
|
|
|
5,306
|
|
|
2,155
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - diluted
|
|
|
615,445
|
|
|
611,513
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.17
|
|
$
|
0.14
|
|
NOTE
16 - STOCK COMPENSATION PLAN
On
October 18, 2001, the Board of Directors adopted the “2001 Stock Option Plan”
(the Plan). The Plan provides for grants of “Incentive Stock Options,” within
the meaning of section 422 of the Internal Revenue Code and “Non-qualified Stock
Options” which are options that do not so qualify. The Plan provides for the
issuance of 100,000 shares of DeKalb's common stock to officers, key employees
and other persons. Options may be granted for a term of up to ten years from
the
effective date of grant and become exercisable within six months of the grant
date. Vesting periods vary by employee. The Board of Directors determines the
per-share exercise price, but for incentive stock options the price may not
be
less than 100% of the fair value of a share of common stock on the date the
option is granted. During 2005, 46,000 incentive stock options were issued
to
officers and employees. There were no incentive stock options issued in 2004.
There were no non-qualified stock options outstanding at December 31, 2005
or
2004.
In
calculating the pro forma disclosures, the fair value of options granted is
estimated as of the date granted using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in
2005:
dividend
yield of 0 percent; expected volatility of 8.66 percent; risk-free interest
rate
of 3.96 percent; and expected life of 7 years.
A
summary
of the status of DeKalb's stock option plan as of December 31, 2005 and 2004,
and changes during the period is presented below:
|
|
2005
|
|
2004
|
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Outstanding
at beginning of year
|
|
|
44,000
|
|
$
|
10
|
|
|
88,000
|
|
$
|
10
|
|
Granted
|
|
|
46,000
|
|
|
11.5
|
|
|
-
|
|
|
10
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
(1,079
|
)
|
|
10
|
|
Forfeited
|
|
|
(2,000
|
)
|
|
10
|
|
|
(42,921
|
)
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at end of year
|
|
|
88,000
|
|
|
|
|
|
44,000
|
|
|
|
|
The
following table summarizes information about stock options outstanding under
DeKalb’s plan at December 31, 2005:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
Number
of options
|
|
|
88,000
|
|
|
88,000
|
|
Weighted
average remaining life
|
|
|
7.86
years
|
|
|
7.86
years
|
|
Weighted
average exercise price
|
|
$
|
10.78
|
|
$
|
10.78
|
|
High
exercise price
|
|
$
|
11.5
|
|
$
|
11.5
|
|
Low
exercise price
|
|
$
|
10
|
|
$
|
10
|
|
NOTE
17 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS
Bank
of
Camden is subject to various regulatory capital requirements administered by
the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material effect on Bank of Camden's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Bank of Camden must meet specific
capital guidelines that involve quantitative measures of Bank of Camden's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Bank of Camden's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk-weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require Bank
of
Camden to maintain minimum ratios of Tier 1 and total capital as a percentage
of
assets and off-balance-sheet exposures, adjusted for risk-weights ranging from
0% to 100%. Tier 1 capital of Bank of Camden consists of common shareholders’
equity, excluding the unrealized gain or loss on securities available-for-sale,
minus certain intangible assets. Bank of Camden's Tier 2 capital consists of
the
allowance for loan losses subject to certain limitations. Total capital for
purposes of computing the capital ratios consists of the sum of Tier 1 and
Tier
2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for
total risk-based capital.
Bank
of
Camden is also required to maintain capital at a minimum level based on average
assets (as defined), which is known as the leverage ratio. Only the strongest
institutions are allowed to maintain capital at the minimum requirement. All
others are subject to maintaining ratios 1% to 2% above the
minimum.
As
of
December 31, 2005, the most recent notifications from Bank of Camden's primary
regulator categorized Bank of Camden as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events that
management believes have changed Bank of Camden's categories.
The
following table summarizes the capital ratios and the regulatory minimum
requirements of Bank of Camden at December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
To
Be Well-
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
Under
|
|
|
|
|
|
|
|
For
Capital
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
Adequacy
Purposes
|
|
Action
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
5,666,000
|
|
|
17.79
|
%
|
$
|
2,547,760
|
|
|
8.00
|
%
|
$
|
3,184,700
|
|
|
10.00
|
%
|
Tier
1 capital (to risk-weighted assets)
|
|
|
5,361,000
|
|
|
16.83
|
%
|
|
1,273,880
|
|
|
4.00
|
%
|
|
1,910,820
|
|
|
6.00
|
%
|
Tier
1 capital (to average assets)
|
|
|
5,361,000
|
|
|
12.22
|
%
|
|
1,755,360
|
|
|
4.00
|
%
|
|
2,194,200
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
5,482,000
|
|
|
19.32
|
%
|
$
|
2,269,600
|
|
|
8.00
|
%
|
$
|
2,837,000
|
|
|
10.00
|
%
|
Tier
1 capital (to risk-weighted assets)
|
|
|
5,216,000
|
|
|
18.39
|
%
|
|
1,134,800
|
|
|
4.00
|
%
|
|
1,702,200
|
|
|
6.00
|
%
|
Tier
1 capital (to average assets)
|
|
|
5,216,000
|
|
|
12.56
|
%
|
|
1,661,720
|
|
|
4.00
|
%
|
|
2,077,150
|
|
|
5.00
|
%
|
The
Federal Reserve has similar requirements for bank holding companies. DeKalb
is
not currently subject to these requirements because the Federal Reserve applies
its guidelines on a bank-only basis for bank holding companies with less than
$150,000,000 in consolidated assets.
NOTE
18 - UNUSED LINE OF CREDIT
At
December 31, 2005, DeKalb had unused lines of credit to purchase federal funds
from other financial institutions totaling $1,900,000. Under the terms of the
agreements, DeKalb may borrow at mutually agreed-upon rates for one to fourteen
day periods. In addition, DeKalb has a line of credit with the Federal Home
Loan
Bank to borrow funds up to 20% of Bank of Camden's total assets, or a borrowing
capacity of $9,264,983 at December 31, 2005. As of December 31, 2005, DeKalb
had
borrowed $7,600,000 on this line.
NOTE
19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The
fair
value of a financial instrument is the amount at which the asset or obligation
could be exchanged in a current transaction between willing parties, other
than
in a forced or liquidation sale. Fair value estimates are made at a specific
point in time based on relevant market information and information about the
financial instruments. Because no market value exists for a significant portion
of the financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors.
The
following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Cash
and Due from Banks -
The
carrying amount is a reasonable estimate of fair value.
Federal
Funds Sold -
Federal
funds sold are for a term of one day, and the carrying amount approximates
the
fair value.
Securities
Purchased Under Agreements to Resell -
The
carrying amount of securities purchased under agreements to resell is a
reasonable estimate of fair value because the interest rate adjusts
nightly.
Investment
Securities -
For
securities available-for-sale, fair value equals the carrying amount which
is
the quoted market price. If quoted market prices are not available, fair values
are based on quoted market prices of comparable securities. Nonmarketable equity
securities are stated at their carrying amount because it approximates fair
value.
Loans
Receivable -
For
certain categories of loans, such as variable rate loans which are repriced
frequently and have no significant change in credit risk, fair values are based
on the carrying amounts. The fair value of other types
of
loans
is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to the borrowers with similar credit ratings
and for the same remaining maturities.
Deposits
- The
fair value of demand deposits, savings, and money market accounts is the amount
payable on demand at the reporting date. The fair values of certificates of
deposit and other time deposits are estimated using a discounted cash flow
calculation that applies current interest rates to a schedule of aggregated
expected maturities.
Securities
Sold Under Agreements to Repurchase -
The
fair value of securities sold under agreements to repurchase is estimated using
a discounted cash flow calculation that applies the current borrowing rate
to a
similar instrument at year end.
Advances
from the Federal Home Loan Bank -
The
carrying amounts of variable rate borrowings are reasonable estimates of fair
value because they can be repriced frequently. The fair values of fixed rate
borrowings are estimated using a discounted cash flow calculation that applies
Bank of Camden’s current borrowing rate from the FHLB.
Accrued
Interest Receivable and Payable
- The
carrying value of these instruments is a reasonable estimate of fair
value.
NOTE
19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- continued
Off-Balance
Sheet Financial Instruments -
In the
ordinary course of business, DeKalb enters into off-balance-sheet financial
instruments consisting of commitments to extend credit and letters of credit.
These financial instruments are recorded in the financial statements when they
become payable by the customer.
The
carrying values and estimated fair values of DeKalb’s financial instruments are
as follows:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
Amount
|
|
Fair
Value
|
|
Amount
|
|
Fair
Value
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
640,962
|
|
$
|
640,962
|
|
$
|
629,566
|
|
$
|
629,566
|
|
Federal
funds sold
|
|
|
1,330,000
|
|
|
1,330,000
|
|
|
3,175,000
|
|
|
3,175,000
|
|
Securities
purchased under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
to resell
|
|
|
501,576
|
|
|
501,576
|
|
|
-
|
|
|
-
|
|
Securities
available-for-sale
|
|
|
11,031,973
|
|
|
11,031,973
|
|
|
9,594,385
|
|
|
9,594,385
|
|
Nonmarketable
securities
|
|
|
576,695
|
|
|
576,695
|
|
|
474,813
|
|
|
474,813
|
|
Loans
held for sale
|
|
|
626,223
|
|
|
638,336
|
|
|
-
|
|
|
-
|
|
Loans
receivable
|
|
|
29,905,856
|
|
|
29,345,448
|
|
|
26,643,037
|
|
|
26,599,945
|
|
Accrued
interest receivable
|
|
|
194,422
|
|
|
194,422
|
|
|
150,875
|
|
|
150,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposit, interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transaction,
and savings accounts
|
|
|
10,292,836
|
|
|
10,292,836
|
|
|
10,051,565
|
|
|
10,051,565
|
|
Certificates
of deposit and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
time
deposits
|
|
|
20,007,789
|
|
|
20,018,458
|
|
|
18,258,813
|
|
|
18,302,282
|
|
Securities
sold under agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
repurchase
|
|
|
3,000,000
|
|
|
2,964,012
|
|
|
3,000,000
|
|
|
2,959,900
|
|
Advances
from the Federal Home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Bank
|
|
|
7,600,000
|
|
|
7,365,559
|
|
|
5,900,000
|
|
|
5,833,842
|
|
Accrued
interest payable
|
|
|
127,360
|
|
|
127,360
|
|
|
120,117
|
|
|
120,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
|
5,450,916
|
|
|
-
|
|
|
4,897,326
|
|
|
-
|
|
Standby
letters of credit
|
|
|
83,030
|
|
|
-
|
|
|
83,030
|
|
|
-
|
|
NOTE
20 - DEKALB BANKSHARES, INC. (PARENT COMPANY ONLY)
Presented
below are the condensed financial statements for DeKalb Bankshares, Inc. (Parent
Company Only).
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
627
|
|
$
|
13,502
|
|
Investment
in banking subsidiary
|
|
|
5,180,076
|
|
|
5,174,715
|
|
Other
assets
|
|
|
12,273
|
|
|
4,178
|
|
Total
assets
|
|
$
|
5,192,976
|
|
$
|
5,192,395
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
35,449
|
|
$
|
-
|
|
Shareholders’
equity
|
|
|
5,157,527
|
|
|
5,192,395
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
5,192,976
|
|
$
|
5,192,395
|
|
NOTE
20 - DEKALB BANKSHARES, INC. (PARENT COMPANY ONLY) - continued
Condensed
Statement of Operations
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Income
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
48,324
|
|
|
2,903
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and equity in
|
|
|
|
|
|
|
|
undistributed
earnings of banking subsidiary
|
|
|
(48,324
|
)
|
|
(2,903
|
)
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
8,095
|
|
|
987
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed earnings of banking subsidiary
|
|
|
145,940
|
|
|
89,637
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
105,711
|
|
$
|
87,721
|
|
Condensed
Statements of Cash Flows
|
|
For
the years ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
105,711
|
|
$
|
87,721
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
(used) by operating activities:
|
|
|
|
|
|
|
|
Increase
in other assets
|
|
|
(8,095
|
)
|
|
(987
|
)
|
Increase
in accounts payable
|
|
|
35,449
|
|
|
-
|
|
Equity
in undistributed earnings of banking subsidiary
|
|
|
(145,940
|
)
|
|
(89,637
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by operating activities
|
|
|
(12,875
|
)
|
|
(2,903
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
-
|
|
|
10,790
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
10,790
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
(12,875
|
)
|
|
7,887
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
13,502
|
|
|
5,615
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
627
|
|
$
|
13,502
|
|
Basis
of Presentation
The
following discussion should be read in conjunction with DeKalb's Financial
Statements and the Notes thereto and the other financial data included elsewhere
in this proxy statement/prospectus. The financial information provided below
has
been rounded in order to simplify its presentation. However, the ratios and
percentages provided below are calculated using the detailed financial
information contained in the Financial Statements, the Notes thereto and the
other financial data included elsewhere in this proxy
statement/prospectus.
General
On
January 19, 2006, DeKalb entered into an agreement and plan of merger with
First
Community, the parent holding company for First Community Bank in Lexington,
South Carolina. Pursuant to the agreement, DeKalb will be merged with and into
First Community and 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 First Community common stock.
The
boards of directors of both companies have approved the merger agreement. The
agreement is subject to the approval of shareholders of DeKalb and regulatory
authorities. The transaction is expected to close during the late second or
early third quarter of 2006.
On
September 30, 2003, Bank of Camden was acquired by its newly formed holding
company, DeKalb. Bank of Camden is the primary asset of the holding company
at
December 31, 2005 and 2004. Amounts previously reported by Bank of Camden remain
unchanged.
Organizing
activities for Bank of Camden began on January 6, 2000. Upon the completion
of
the application process with the State of South Carolina Board of Financial
Institutions for a state charter and with the Federal Deposit Insurance
Corporation for deposit insurance, Bank of Camden sold 609,060 shares of common
stock at a price of $10.00 per share. The offering resulted in capital totaling
$5,866,807, net of selling expenses of $223,793. Bank of Camden began operations
on February 20, 2001 at its main office at 631 West DeKalb Street in Camden,
South Carolina.
Results
of Operations
Year
ended December 31, 2005, compared with year ended December 31,
2004
Net
interest income increased $98,751, or 7.05% in 2005 from $1,400,970 in 2004.
The
increase in net interest income was due primarily to an increase in average
earning assets. Average earning assets increased $5,530,000 or 15.34%, due
to
continued growth in the loan and investment portfolios. The primary components
of interest income were interest on loans, including fees, of $1,959,542 and
interest on securities available for sale of $401,067.
DeKalb's
net interest spread and net interest margin were 3.23% and 3.60%, respectively,
in 2005 compared to 3.62% and 3.89%, respectively, in 2004. The decrease in
net
interest spread was primarily the result of rates paid on interest-bearing
liabilities increasing more rapidly than rates earned on interest earning
assets. The yield on earning assets increased from 5.31% in 2004 to 5.86% in
2005. Specifically, the loan portfolio yield increased from 6.41% in 2004 to
6.86% in 2005. Rates paid on interest-bearing liabilities increased from 1.86%
in 2004 to 2.63% in 2005.
The
provision for loan losses was $58,120 in 2005 compared to $109,000 in 2004.
DeKalb continues to maintain the allowance for loan losses at a level management
believes to be sufficient to cover known and probable losses in the loan
portfolio.
Noninterest
income increased $168,434 or 75.04%, to $392,890 in 2005 from $224,456 in 2004.
The majority of the increase is attributable to an increase of $166,330, or
430%, in gains on the sale of residential mortgage loans from 2004 to 2005.
This
increase is due to growth in the number of mortgage refinances and
originations
during 2005 compared to 2004. Service charges on deposit accounts decreased
$6,979, or 4.47%, to $149,199 for the year ended December 31, 2005.
Noninterest
expense increased $272,733, or 19.81%, to $1,649,285 in 2005 from $1,376,552
in
2004. Other operating expenses increased $63,308 to $610,703 for the year ended
December 31, 2005. The increases are mainly attributable to the growth of
DeKalb. Salaries and benefits increased $197,932, or 28.05%, to $903,485 in
2005
from $705,553 in 2004. This increase is attributable to normal pay increases
and
additional staff. DeKalb's efficiency ratio was 87.11% in 2005 compared to
84.68% in 2004. The efficiency ratio is defined as noninterest expense divided
by the sum of net interest income and noninterest income, net of gains and
losses on sales of assets.
Net
income was $105,711 in 2005 compared to $87,721 in 2004. The increase in net
income reflects our continued growth, as average-earning assets increased from
$36,054,000 for the year ended December 31, 2004 to $41,584,000 for the year
ended December 31, 2005. Return on average assets during 2005 was 0.24%,
compared to 0.23% during 2004, and return on average equity was 2.42% during
2005, compared to 1.70% during 2004.
Net
Interest Income
General.
The
largest component of Bank of Camden’s net income is its net interest income,
which is the difference between the income earned on assets and interest paid
on
deposits and borrowings used to support such assets. Net interest income is
determined by the yields earned on Bank of Camden’s interest-earning assets and
the rates paid on its 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 divided by average
interest-earning assets represents Bank of Camden’s net interest
margin.
Average
Balances, Income and Expenses and Rates.
The
following tables set forth, for the periods indicated, information related
to
Bank of Camden’s average balance sheet and its 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 the daily balances throughout the
periods indicated.
Average
Balances, Income and Expenses and Rates
|
|
For
the year ended
|
|
For
the year ended
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
Average
|
|
Income/
|
|
Yield/
|
|
(Dollars
in thousands)
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Balance
|
|
Expense
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$
|
28,581
|
|
$
|
1,960
|
|
|
6.86
|
%
|
$
|
23,765
|
|
$
|
1,523
|
|
|
6.41
|
%
|
Securities,
taxable
|
|
|
10,525
|
|
|
401
|
|
|
3.81
|
|
|
9,478
|
|
|
348
|
|
|
3.67
|
|
Federal
funds sold and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonmarketable
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
2,478
|
|
|
75
|
|
|
3.03
|
|
|
2,811
|
|
|
45
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning assets
|
|
|
41,584
|
|
|
2,436
|
|
|
5.86
|
|
|
36,054
|
|
|
1,916
|
|
|
5.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
581
|
|
|
|
|
|
|
|
|
619
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
1,390
|
|
|
|
|
|
|
|
|
1,390
|
|
|
|
|
|
|
|
Other
assets
|
|
|
620
|
|
|
|
|
|
|
|
|
779
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(291
|
)
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
43,884
|
|
|
|
|
|
|
|
$
|
38,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transaction accounts
|
|
$
|
3,972
|
|
$
|
13
|
|
|
0.33
|
%
|
$
|
3,374
|
|
$
|
11
|
|
|
0.33
|
%
|
Savings
deposits
|
|
|
3,332
|
|
|
47
|
|
|
1.41
|
|
|
4,008
|
|
|
50
|
|
|
1.25
|
|
Time
deposits
|
|
|
18,659
|
|
|
553
|
|
|
2.96
|
|
|
16,092
|
|
|
322
|
|
|
2
|
|
Short-term
borrowings
|
|
|
5,757
|
|
|
202
|
|
|
3.51
|
|
|
4,591
|
|
|
109
|
|
|
2.37
|
|
Long-term borrowings
|
|
|
3,893
|
|
|
122
|
|
|
3.13
|
|
|
2,836
|
|
|
84
|
|
|
2.95
|
|
Total
interest-bearing liabilities
|
|
|
35,613
|
|
|
937
|
|
|
2.63
|
|
|
30,901
|
|
|
576
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
2,914
|
|
|
|
|
|
|
|
|
2,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other liabilities
|
|
|
155
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
5,202
|
|
|
|
|
|
|
|
|
5,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders’ equity
|
|
$
|
43,884
|
|
|
|
|
|
|
|
$
|
38,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
3.23
|
%
|
|
|
|
|
|
|
|
3.45
|
%
|
Net
interest income
|
|
|
|
|
$
|
1,499
|
|
|
|
|
|
|
|
$
|
1,340
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.60
|
%
|
|
|
|
|
|
|
|
3.72
|
%
|
_________________
(1)
|
Includes
loans held for sale. There were no loans in nonaccrual status as
of
December 31, 2005 and 2004, respectively.
|
Analysis
of Changes in Net Interest Income.
Net
interest income can also be analyzed in terms of the impact of changing rates
and changing volume. The following table describes the extent to which changes
in interest rates and changes in the volume of earning assets and interest-
bearing liabilities have affected DeKalb’s interest income and interest expense
during the periods indicated. The table below provides information on changes
in
each category attributable to (i) changes due to volume (change in volume
multiplied by prior period rate), (ii) changes due to rates (changes in rates
multiplied by prior period volume) and (iii) changes in rate and volume (change
in rate multiplied by the change in volume).
|
|
2005
compared to 2004
|
|
|
|
Due
to increase (decrease) in
|
|
(Dollars
in thousands)
|
|
Volume
|
|
Rate(1)
|
|
Volume/Rate(2)
|
|
Total
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
securities
|
|
$
|
38
|
|
$
|
13
|
|
$
|
2
|
|
$
|
53
|
|
Loans
|
|
|
309
|
|
|
107
|
|
|
21
|
|
|
437
|
|
Federal
funds sold and nonmarketable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
securities
|
|
|
(5
|
)
|
|
40
|
|
|
(5
|
)
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
|
342
|
|
|
160
|
|
|
18
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
|
41
|
|
|
171
|
|
|
18
|
|
|
230
|
|
Other
borrowings
|
|
|
58
|
|
|
56
|
|
|
17
|
|
|
131
|
|
Total
interest expense
|
|
|
99
|
|
|
227
|
|
|
35
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
243
|
|
$
|
(67
|
)
|
$
|
(17
|
)
|
$
|
159
|
|
_______________________
(1) Net
interest income divided by total interest earning assets.
(2) Changes
to both rate and volume, (in iii above), which cannot be segregated, have been
allocated proportionately.
During
2005 and 2004, long term interest rates were relatively stable while short-term
rates increased significantly. Changes in interest rates that can have
significant effects on Bank of Camden are still possible. In the absence of
significant changes in market interest rates, any changes in net interest income
during 2006 are expected to result primarily from changes in the volumes of
interest earning assets and liabilities.
Interest
Sensitivity.
DeKalb
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. Interest rate sensitivity can be managed
by repricing assets or liabilities, selling securities available for sale,
replacing an asset or liability at maturity, or 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.
The
following table sets forth DeKalb's interest rate sensitivity at December 31,
2005.
Interest
Sensitivity Analysis
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
After
Three
|
|
|
|
Than
|
|
Greater
|
|
|
|
|
|
Within
|
|
Through
|
|
|
|
One
Year
|
|
Than
|
|
|
|
(Dollars
in thousands)
|
|
Three
|
|
Twelve
|
|
Within
|
|
or
Non-
|
|
Five
|
|
|
|
|
|
Months
|
|
Months
|
|
One
Year
|
|
Sensitive
|
|
Years
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
9,975
|
|
$
|
2,700
|
|
$
|
12,675
|
|
$
|
9,847
|
|
$
|
8,010
|
|
$
|
30,532
|
|
Securities
|
|
|
577
|
|
|
737
|
|
|
1,314
|
|
|
4,279
|
|
|
6,016
|
|
|
11,609
|
|
Federal
funds sold and other
|
|
|
1,884
|
|
|
-
|
|
|
1,884
|
|
|
-
|
|
|
-
|
|
|
1,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning assets
|
|
|
12,436
|
|
|
3,437
|
|
|
15,873
|
|
|
14,126
|
|
|
14,026
|
|
|
44,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
|
|
4,177
|
|
|
-
|
|
|
4,177
|
|
|
-
|
|
|
-
|
|
|
4,177
|
|
Savings
deposits
|
|
|
3,136
|
|
|
-
|
|
|
3,136
|
|
|
-
|
|
|
-
|
|
|
3,136
|
|
Time
deposits
|
|
|
7,894
|
|
|
10,866
|
|
|
18,760
|
|
|
1,248
|
|
|
-
|
|
|
20,008
|
|
Total
interest-bearing deposits
|
|
|
15,207
|
|
|
10,866
|
|
|
26,073
|
|
|
1,248
|
|
|
-
|
|
|
27,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from Federal Home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Bank
|
|
|
4,600
|
|
|
-
|
|
|
4,600
|
|
|
-
|
|
|
3,000
|
|
|
7,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,000
|
|
|
-
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
19,807
|
|
|
10,866
|
|
|
30,673
|
|
|
4,248
|
|
|
3,000
|
|
|
37,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
gap
|
|
$
|
(7,371
|
)
|
$
|
(7,429
|
)
|
$
|
(14,800
|
)
|
$
|
9,878
|
|
$
|
11,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
gap
|
|
$
|
(7,371
|
)
|
$
|
(14,800
|
)
|
$
|
(14,800
|
)
|
$
|
(4,922
|
)
|
$
|
6,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of cumulative gap to total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earning assets
|
|
|
(16.74
|
%)
|
|
(33.62
|
%)
|
|
(33.62
|
%)
|
|
(11.18
|
%)
|
|
13.87
|
%
|
|
|
|
The
above
table reflects the balances of interest-earning assets and interest-bearing
liabilities at the earlier of their repricing or maturity dates. Overnight
federal funds are reflected at the earliest pricing interval due to the
immediately available nature of the instruments. Debt securities are reflected
at each instrument’s ultimate maturity date. Interest-bearing liabilities with
no contractual maturity, such as savings deposits and interest-bearing
transaction accounts, are reflected in the earliest repricing period due to
contractual arrangements which give DeKalb the opportunity to vary the rates
paid on those deposits within a thirty-day or shorter period. Fixed rate time
deposits, principally certificates of deposit, are reflected at their
contractual maturity date. Advances from the Federal Home Loan Bank are
reflected at their contractual maturity dates, except for daily rate credit
advances which can reprice daily. Securities sold under agreements to repurchase
are reflected at their contractual maturity date.
DeKalb
is
in a liability sensitive position (or a negative gap) of $14.8 million over
the
12 month timeframe. The gap is negative when interest sensitive liabilities
exceed interest sensitive assets, as was the case at the end of 2005 with
respect to the one-year time horizon. When interest sensitive assets exceed
interest sensitive liabilities for a specific repricing "horizon," a positive
interest sensitivity gap results.
A
negative gap generally has an adverse effect on net interest income during
periods of rising rates. A negative one year gap position occurs when the dollar
amount of rate sensitive liabilities maturing or repricing within one year
exceeds the dollar amount of rate sensitive assets maturing or repricing during
that same period. As a result, during periods of rising interest rates, the
interest paid on interest-bearing liabilities will increase faster than interest
received from earning assets, thus reducing net interest income. The reverse
is
true in periods of declining interest rates resulting generally in an increase
in net interest income. DeKalb’s Board of Directors and
management
review various calculations in measuring and monitoring interest rate risk.
DeKalb does not feel traditional gap analysis as presented above is a precise
indicator of its interest sensitivity position.
Gap
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. For example, rates paid on
a
substantial portion of core deposits may change contractually within a
relatively short time frame, but those rates are viewed by management as
significantly less interest-sensitive than market-based rates such as those
paid
on non-core deposits. Management and the Board focus primarily upon an
estimation of net interest margin levels over a variety of rate scenarios using
a rate shocked simulation analysis. In this methodology, interest income and
interest expense are estimated under a variety of rate possibilities. This
analysis provides a more dynamic view of the effect of a rate change on net
interest income by simulating the roll-off and reinvestment of funds using
present and forecast pricing to calculate interest flows. Net interest income
also may be impacted by other significant factors in a given interest rate
environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.
Provision
and Allowance for Loan Losses
General.
DeKalb
has developed policies and procedures for evaluating the overall quality of
its
credit portfolio and the timely identification of potential problem credits.
On
a quarterly basis, DeKalb's Board of Directors reviews and approves the
appropriate level for DeKalb's allowance for loan losses based upon management’s
recommendations, the results of the internal monitoring and reporting system,
and an analysis of economic conditions in its market. In the absence of
meaningful historical experience of its own, DeKalb uses the experience of
its
management at other institutions, guidance from regulators and industry norms
for start up banks, as the basis for determining the allowance.
Additions
to the allowance for loan losses, which are expensed as the provision for loan
losses on DeKalb's income statement, are made periodically to maintain the
allowance at an appropriate level based on management’s analysis of the losses
inherent in the loan portfolio. Loan losses and recoveries are charged or
credited directly to the allowance. The amount of the provision is a function
of
the level of loans outstanding, the level of nonperforming loans, historical
loan loss experience, the amount of loan losses actually charged against the
reserve during a given period, and current and anticipated economic
conditions.
Based
on
present information and an ongoing evaluation, management considers the
allowance for loan losses to be adequate to meet presently known and estimated
inherent losses in the loan portfolio. Management’s judgment about the adequacy
of the allowance is based upon a number of assumptions about future events
which
it believes to be reasonable but which may or may not be accurate. Thus, there
can be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for
loan
losses will not be required. DeKalb does not allocate the allowance for loan
losses to specific categories of loans but evaluates the adequacy on an overall
portfolio basis utilizing a risk grading system.
In
order
to determine an adequate level for the allowance for loan losses, DeKalb
calculates a general reserve based on a percentage allocation for each of the
categories of the following unclassified loan types: real estate, commercial,
consumer and mortgage. DeKalb applies general loss factors to each category
and
may adjust these percentages as appropriate given consideration of local
economic conditions, exposure concentration that may exist in the portfolio,
changes in trends of past due loans, problem loans and charge-offs and
anticipated loan growth. The general estimate is then added to any specific
allocations made on account of particular loans or groups of loans that exhibit
significant characteristics which are different from the general types. The
resulting amount is the total allowance for loan losses. Due to DeKalb’s limited
operating history, the provision for loan losses has been made primarily as
a
result of management's assessment of general loan loss risk. The evaluation
is
inherently subjective as it requires estimates that are susceptible to
significant change. In addition, various regulatory agencies review the
allowance for loan losses through their periodic examinations, and they may
require additions to the allowance for loan losses based on their judgment
about
information available to them at the time of their examinations. As of December
31, 2005, DeKalb's allowance for loan losses totaled $305,000, an increase
of
$38,522 from the prior year. This increase results from net charge-offs of
$19,598 and a provision for loan losses of $58,120 expensed during 2005. The
categories and concentrations of loans have been relatively consistent during
the past two years.
The
following table sets forth certain information with respect to Bank of Camden’s
allowance for loan losses and the composition of charge-offs and recoveries
for
the years ended December 31, 2005 and 2004.
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Total
loans outstanding at end of period
|
|
$
|
29,906
|
|
$
|
26,643
|
|
|
|
|
|
|
|
|
|
Average
loans outstanding
|
|
$
|
28,581
|
|
$
|
23,765
|
|
|
|
|
|
|
|
|
|
Balance
of allowance for loan losses at beginning of period
|
|
$
|
266
|
|
$
|
305
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
|
19
|
|
|
150
|
|
Real
estate
|
|
|
-
|
|
|
-
|
|
Consumer
and other
|
|
|
1
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Total
charge-offs:
|
|
|
20
|
|
|
153
|
|
|
|
|
|
|
|
|
|
Recoveries
of previous charge-offs:
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
|
-
|
|
|
5
|
|
Real
estate
|
|
|
-
|
|
|
-
|
|
Consumer
and other
|
|
|
1
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Total
recoveries
|
|
|
1
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Net
charge-offs:
|
|
|
19
|
|
|
148
|
|
Provision
for loan losses
|
|
|
58
|
|
|
109
|
|
|
|
|
|
|
|
|
|
Balance
of allowance for loan losses at end of period
|
|
$
|
305
|
|
$
|
266
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to period end loans
|
|
|
1.02
|
%
|
|
1.00
|
%
|
Ratio
of net charge-offs to average loans
|
|
|
0.07
|
%
|
|
0.62
|
%
|
Nonperforming
Assets
Nonperforming
Loans.
There
were no loans in nonaccrual status at December 31, 2005 or 2004. There were
no
loans past due ninety days or more and still accruing interest and no
restructured loans at December 31, 2005 or 2004.
For
the
year ended December 31, 2005, there was no interest recognized in income on
nonaccrual loans. No loans were placed in nonaccrual status during
2005.
Accrual
of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower’s financial condition is such that the collection of interest is
doubtful unless the estimated net realizable value of collateral exceeds the
principal balance and accrued interest. A delinquent loan is generally placed
in
nonaccrual status when it becomes 90 days or more past due. No additional
interest is accrued on the loan balance until the collection of both principal
and interest becomes reasonably certain. When a nonaccruing loan is finally
resolved, there may ultimately be a writedown or charge-off of the principal
balance of the loan which would necessitate additional charges to
earnings.
Potential
Problem Loans.
DeKalb
maintains a list of potential problem loans that are not included in impaired
loans (nonaccrual loans or loans past due 90 days or more and still accruing
interest). A loan is added to the potential problem loan list when management
becomes aware of information about possible credit problems of the borrower
that
causes doubts about its ability to comply with current loan repayment terms.
At
December 31, 2005, DeKalb had not identified any potential problem loans. The
results of this internal review process are considered in determining
management’s assessment of the adequacy of the allowance for loan
losses.
Noninterest
Income and Expense
Noninterest
Income.
For the
year ended December 31, 2005, noninterest income totaled $392,890 as compared
to
$224,456 for the year ended December 31, 2004. This increase is primarily
attributable to an increase of $166,330 in gains on the sale of residential
mortgage loans from 2004 to 2005, due to the increase of mortgage loan
refinances and originations. The next largest component of noninterest income
was service charges on deposit accounts which totaled $149,199 for the year
ended December 31, 2005, a decrease of $6,979 or 4.47% when compared to 2004.
The
following table sets forth the principal components of noninterest income for
the years ended December 31, 2005 and 2004.
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Gains
on residential mortgage loan sales
|
|
$
|
205
|
|
$
|
39
|
|
Service
charges on deposit accounts
|
|
|
149
|
|
|
156
|
|
Other
service charges, commissions, and fees
|
|
|
39
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Total
noninterest income
|
|
$
|
393
|
|
$
|
225
|
|
Noninterest
Expense.
For
the
year ended December 31, 2005, noninterest expense totaled $1,649,285 as compared
to $1,376,552 for the year ended December 31, 2004. Salaries and employee
benefits, which comprised the largest component of noninterest expense, totaled
$903,485. Other operating expenses increased $63,308 or 11.57% to $610,703
for
the year ended December 31, 2005, when compared to 2004. These increases in
expenses were associated with the growth of DeKalb.
The
following table sets forth the primary components of noninterest expense for
the
years ended December 31, 2005 and 2004.
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$
|
903
|
|
$
|
706
|
|
Net
occupancy expense
|
|
|
83
|
|
|
76
|
|
Advertising
and marketing expense
|
|
|
27
|
|
|
37
|
|
Office
supplies, forms, and stationery
|
|
|
47
|
|
|
42
|
|
Data
processing
|
|
|
151
|
|
|
145
|
|
Professional
fees
|
|
|
102
|
|
|
86
|
|
Furniture
and equipment expense
|
|
|
52
|
|
|
47
|
|
Other
|
|
|
284
|
|
|
238
|
|
|
|
|
|
|
|
|
|
Total
noninterest expense
|
|
$
|
1,649
|
|
$
|
1,377
|
|
Earning
Assets
Loans.
Loans
are
the largest category of earning assets and typically provide higher yields
than
other types of earning assets. A certain degree of risk taking is inherent
in
the extension of credit. Management has established loan and credit policies
and
practices designed to control both the types and amounts of risks assumed,
and
to minimize losses. Such policies and practices include limitations on
loan-to-collateral values for various types of collateral, requirements for
appraisals of real estate collateral, problem loan management practices and
collection procedures, and nonaccrual and charge-off guidelines. Loans averaged
$28,581,000 in 2005 as compared to $23,765,000 in 2004. At December 31, 2005,
total loans were $29,905,856, or 12.25%, higher than the December 31, 2004
balance of $26,643,037.
The
following table sets forth the composition of the loan portfolio by category
at
December 31, 2005 and 2004 and highlights Bank of Camden’s general emphasis on
loans secured by real estate.
Composition
of Loan Portfolio
December
31,
|
|
2005
|
|
2004
|
|
|
|
|
|
Percent
of
|
|
|
|
Percent
of
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
$
|
2,090
|
|
|
6.99
|
%
|
$
|
3,279
|
|
|
12.31
|
%
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
5,198
|
|
|
17.38
|
|
|
2,426
|
|
|
9.11
|
|
Mortgage-residential
|
|
|
12,261
|
|
|
41
|
|
|
12,009
|
|
|
45.07
|
|
Mortgage-nonresidential
|
|
|
9,320
|
|
|
31.16
|
|
|
7,700
|
|
|
28.9
|
|
Consumer
|
|
|
1,037
|
|
|
3.47
|
|
|
1,229
|
|
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
29,906
|
|
|
100
|
%
|
|
26,643
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(305
|
)
|
|
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
$
|
29,601
|
|
|
|
|
|
|
|
$
|
26,377
|
|
The
largest component of loans in DeKalb's loan portfolio is real estate mortgage
loans. At December 31, 2005, real estate mortgage loans totaled $21,581,000
and
represented 72.16% of the total loan portfolio. At December 31, 2004, real
estate mortgage loans totaled $19,709,000 and represented 73.97% of the total
loan portfolio.
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. It is common practice for financial
institutions in Bank of Camden’s market area to obtain 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
portfolio.
Residential
real estate loans consist of loans secured by first and second mortgages on
single or multi-family residential dwellings. Nonresidential mortgage loans
include loans secured by commercial properties and other loans secured by
multi-family properties and farmland. The repayment of both residential and
nonresidential real estate loans is dependent primarily on the income and cash
flows of the borrowers, with the real estate serving as a secondary or
liquidation source of repayment. For the past several years, the demand for
residential and commercial real estate loans in the Camden market has been
higher than normal due to the low interest rate environment.
Commercial
and industrial loans primarily represent loans made to businesses, and may
be
made on either a secured or an unsecured basis. When taken, collateral usually
consists of liens on receivables, equipment, inventories, furniture and
fixtures. Unsecured business loans are generally short-term with emphasis on
repayment strengths and low debt-to-worth ratios. Commercial lending involves
significant risk because repayment usually depends on the cash flows generated
by a borrower’s business, and the debt service capacity of a business can
deteriorate because of downturns in national and local economic conditions.
To
control risk, more in-depth initial and continuing financial analysis of a
borrower’s cash flows and other financial information is generally
required.
Consumer
loans generally involve more credit risks than other loans because of the type
and nature of the underlying collateral or because of the absence of any
collateral. Consumer loan repayments are dependent on the borrower’s continuing
financial stability and are likely to be adversely affected by job loss, divorce
and illness. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans in the case of default. In most cases,
any
repossessed collateral will not provide an adequate source of repayment of
the
outstanding loan balance.
DeKalb's
loan portfolio reflects the diversity of its market. DeKalb's office is located
in Kershaw County, South Carolina. The economy of Kershaw County contains
elements of medium and light manufacturing, regional
health
care, and distribution facilities. Management expects the area to remain stable
with continued growth in the near future. The diversity of the economy creates
opportunities for all types of lending. DeKalb does not engage in foreign
lending.
The
repayment of loans in the loan portfolio as they mature is also a source of
liquidity for DeKalb. The following table sets forth DeKalb's loans maturing
within specified intervals at December 31, 2005.
Loan
Maturity Schedule and Sensitivity to Changes in Interest
Rates
|
|
|
|
Over
One
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
December
31, 2005
|
|
One
Year
|
|
Through
|
|
Over
|
|
|
|
(Dollars
in thousands)
|
|
or
Less
|
|
Five
Years
|
|
Five
Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
$
|
763,380
|
|
$
|
1,169,501
|
|
$
|
157,346
|
|
$
|
2,090,227
|
|
Real
estate
|
|
|
6,570,944
|
|
|
7,961,308
|
|
|
12,246,198
|
|
|
26,778,450
|
|
Consumer
and other
|
|
|
367,134
|
|
|
631,717
|
|
|
38,328
|
|
|
1,037,506
|
|
|
|
$
|
7,701,458
|
|
$
|
9,762,526
|
|
$
|
12,441,872
|
|
$
|
29,905,856
|
|
Loans
maturing after one year with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
interest rates
|
|
|
|
|
|
|
|
|
|
|
$
|
14,908,525
|
|
Floating
interest rates
|
|
|
|
|
|
|
|
|
|
|
|
7,295,873
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,204,398
|
|
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.
Consequently, management believes this treatment presents fairly the maturity
and repricing structure of the loan portfolio shown in the above
table.
There
were no concentrations of loans exceeding 10% of total loans at December 31,
2005 or 2004 that are not otherwise disclosed as a category in the tables
above.
Investments
Investment
Securities.
The
investment securities portfolio is also a component of DeKalb's total earning
assets. Total securities averaged $11,066,000 in 2005 as compared to $9,825,000
in 2004. At December 31, 2005, the total securities portfolio was $11,608,668,
an increase of $1,539,470 over the December 31, 2004 balance of $10,069,198.
The
increase was primarily invested in short-term debt of U.S. government agencies.
All marketable equity securities were designated as available-for-sale and
were
recorded at their estimated fair market value. Nonmarketable equity securities,
which are included in total securities, totaled $576,695 and $474,813 at
December 31, 2005 and 2004, respectively, and are recorded at cost. DeKalb
has
no tax-exempt securities.
The
following table sets forth the carrying value of the securities held by Bank
of
Camden at December 31, 2005 and 2004.
December
31,
|
|
2005
|
|
2004
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies and corporations
|
|
$
|
3,931
|
|
$
|
2,501
|
|
Mortgage-backed
securities
|
|
|
7,101
|
|
|
7,093
|
|
Nonmarketable
equity securities
|
|
|
577
|
|
|
475
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
$
|
11,609
|
|
$
|
10,069
|
|
Mortgage-backed
securities were comprised of securities issued by the Federal Home Loan Mortgage
Corporation (FHLMC) and Federal National Mortgage Association (FNMA). The
amortized cost and fair value of securities held at December 31, 2005 that
were
issued by FHLMC were $4,020,479 and $3,894,278, respectively. The amortized
cost
and fair value of securities held at December 31, 2005 that were issued by
FNMA
were $3,302,948 and $3,206,321, respectively.
The
following table sets forth the scheduled maturities and weighted average yields
of securities held at December 31, 2005.
Investment
Securities Maturity Distribution and Yields
Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
After
Five But
|
|
After
|
|
December
31, 2005
|
|
No
Maturity
|
|
Within
One Year
|
|
|
|
Within
Ten Years
|
|
Ten
Years
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
U.S.
government agencies
|
|
$
|
-
|
|
|
|
% |
$
|
736
|
|
|
2.49
|
%
|
$
|
3,195
|
|
|
3.58
|
%
|
$
|
-
|
|
|
|
% |
$
|
-
|
|
|
|
% |
Mortgage-backed
securities
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
1,084
|
|
|
3.43
|
|
|
1,632
|
|
|
3.61
|
|
|
4,385
|
|
|
4.54
|
|
Nonmarketable
equity securities
|
|
|
577
|
|
|
3.64
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
577
|
|
|
|
|
$
|
736
|
|
|
|
|
$
|
4,279
|
|
|
|
|
$
|
1,632
|
|
|
|
|
$
|
4,385
|
|
|
|
|
Other
attributes of the securities portfolio, including yields and maturities, are
discussed above.
Short-Term
Investments.
Short-term investments, which consist primarily of federal funds sold,
securities purchased under agreements to resell, and interest-bearing deposit
accounts with other Banks, averaged $1,938,000 in 2005 and totaled $1,883,402
and $3,550,287 at December 31, 2005 and 2004, respectively. These funds are
an
important source of DeKalb's liquidity. Federal funds are generally invested
in
an earning capacity on an overnight basis. Interest-bearing deposit accounts
consist of DeKalb's interest-bearing account with the Federal Home Loan Bank
and
time deposits with other banks.
Deposits
and Other Interest-Bearing Liabilities
Average
interest-bearing liabilities totaled $35,613,000 in 2005 as compared to
$30,901,000 in 2004. Total interest-bearing liabilities totaled $37,921,220
at
December 31, 2005, as compared to $34,421,610 at December 31, 2004.
Deposits.
Average
total deposits totaled $28,877,000 during 2005, as compared to $25,864,000
during 2004. At December 31, 2005, total deposits were $30,300,625 as compared
to $28,310,378 at December 31, 2004. Most of the growth in deposits were in
time
deposits of $100,000 or more as shown below.
The
following table sets forth the deposits of DeKalb by category as of December
31,
2005 and 2004.
December
31,
|
|
2005
|
|
2004
|
|
|
|
|
|
Percent
of
|
|
|
|
Percent
of
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Deposits
|
|
Amount
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposit accounts
|
|
$
|
2,979
|
|
|
9.83
|
%
|
$
|
2,789
|
|
|
9.85
|
%
|
NOW
accounts
|
|
|
4,178
|
|
|
13.79
|
|
|
3,450
|
|
|
12.19
|
|
Savings
accounts
|
|
|
3,136
|
|
|
10.35
|
|
|
3,813
|
|
|
13.47
|
|
Time
deposits less than $100,000
|
|
|
5,758
|
|
|
19
|
|
|
5,487
|
|
|
19.38
|
|
Time
deposits of $100,000 or over
|
|
|
14,250
|
|
|
47.03
|
|
|
12,771
|
|
|
45.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$
|
30,301
|
|
|
100.00
|
%
|
$
|
28,310
|
|
|
100.00
|
%
|
Core
deposits, which exclude time deposits of $100,000 or more, provide a relatively
stable funding source for DeKalb's loan portfolio and other earning assets.
DeKalb's core deposits were approximately $16,051,112 at December 31,
2005.
The
following table sets forth the average amounts of deposits and average rates
on
each category for 2005 and 2004.
|
|
2005
|
|
2004
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Rate
Paid
|
|
Amount
|
|
Rate
Paid
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposit accounts
|
|
$
|
2,914
|
|
|
0.00
|
%
|
$
|
2,390
|
|
|
0.00
|
%
|
NOW
accounts
|
|
|
3,972
|
|
|
0.33
|
|
|
3,374
|
|
|
0.33
|
|
Savings
accounts
|
|
|
3,332
|
|
|
1.41
|
|
|
4,008
|
|
|
1.25
|
|
Time
deposits less than $100,000
|
|
|
6,007
|
|
|
2.85
|
|
|
4,997
|
|
|
2.25
|
|
Time
deposits of $100,000 or over
|
|
|
12,652
|
|
|
3.02
|
|
|
11,095
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$
|
28,877
|
|
|
2.12
|
%
|
$
|
25,864
|
|
|
1.48
|
%
|
Deposits,
and particularly core deposits, have been DeKalb's primary source of funding
and
have enabled DeKalb to meet successfully both its short-term and long-term
liquidity needs. Management anticipates that such deposits will continue to
be
DeKalb's primary source of funding in the future. DeKalb's loan-to-deposit
ratio
was 100.76% and 94.11% at December 31, 2005 and 2004, respectively. The maturity
distribution of DeKalb's time deposits over $100,000 at December 31, 2005,
is
set forth in the following table.
Maturities
of Time Deposits of $100,000 or More
|
|
|
|
|
|
After
Six
|
|
|
|
|
|
|
|
|
|
After
Three
|
|
Through
|
|
|
|
|
|
|
|
Within
Three
|
|
Through
Six
|
|
Twelve
|
|
After
Twelve
|
|
|
|
(Dollars
in thousands)
|
|
Months
|
|
Months
|
|
Months
|
|
Months
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits of $100,000 or more
|
|
$
|
6,446
|
|
$
|
4,823
|
|
$
|
2,491
|
|
$
|
490
|
|
$
|
14,250
|
|
Approximately
45.24% of DeKalb's time deposits over $100,000 had scheduled maturities within
three months, and 79.08% had maturities within six months. Large time 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.
Other
Borrowings.
Other
borrowings consist of advances from the Federal Home Loan Bank of Atlanta and
securities sold under agreements to repurchase. Advances from the Federal Home
Loan Bank averaged $6,631,781 in 2005 and totaled $7,600,000 at December 31,
2005 with a weighted average interest rate of 4.20%. The maximum amount of
advances at any month-end in 2005 was $7,600,000 and the weighted average
interest rate was 3.56% in 2005. Advances from the Federal Home Loan Bank
averaged $4,574,521 in 2004 and totaled $5,900,000 at December 31, 2004 with
a
weighted average interest rate of 2.64%. The maximum amount of advances at
any
month-end in 2004 was $5,900,000 and the weighted average interest rate was
2.36% in 2004.
Advances
from Federal Home Loan Bank are collateralized by one-to-four family residential
mortgage loans and DeKalb's investment in Federal Home Loan Bank Stock. Although
we expect to continue using Federal Home Loan Bank advances as a secondary
funding source, core deposits will continue to be our primary funding source.
Of
the $7,600,000 advances from Federal Home Loan Bank outstanding at December
31,
2005, $4,100,000 have scheduled principal reductions in 2006, $500,000 have
scheduled principal reductions in 2011, $1,000,000 have scheduled principal
reductions in 2012 and $2,000,000 have scheduled principal reductions in
2015.
Securities
sold under agreement to repurchase averaged $3,000,000 in 2005 and totaled
$3,000,000 at December 31, 2005. The maximum amount of advances at any month-end
in 2005 was $3,000,000 and the weighted average interest rate was 2.95% in
2005.
The maximum amount of agreements at any month-end in 2004 was $3,000,000 and
the
weighted average interest rate was 2.95% in 2004.
Return
on Equity and Assets
The
following table shows the return on assets (net income divided by average total
assets), return on equity (net income divided by average equity), dividend
payout ratio (dividends declared per share divided by net income per share),
and
equity to assets ratio (average equity divided by average total assets) for
each
year indicated.
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Return
on assets
|
|
|
0.24
|
%
|
|
0.23
|
%
|
Return
on equity
|
|
|
2.42
|
%
|
|
1.70
|
%
|
Dividend
payout
ratio
|
|
|
N/A
|
|
|
N/A
|
|
Equity
to assets ratio
|
|
|
11.85
|
%
|
|
13.41
|
%
|
Capital
Bank
of
Camden is subject to various regulatory capital requirements promulgated by
the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material effect on Bank of Camden's
financial condition. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Bank of Camden must meet specific
capital guidelines that involve quantitative measures of Bank of Camden's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Bank of Camden's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require Bank
of
Camden to maintain minimum ratios of Tier 1 and total capital as a percentage
of
assets and off-balance-sheet exposures, adjusted for risk weights ranging from
0% to 100%. Tier 1 capital of Bank of Camden consists of common shareholders’
equity, excluding the unrealized gain or loss on securities available-for-sale,
minus certain intangible assets. Bank of Camden's Tier 2 capital consists of
the
allowance for loan losses subject to certain limitations. Total capital for
purposes of computing the capital ratios consists of the sum of Tier 1 and
Tier
2 capital. The regulatory minimum requirements are 4% for Tier 1 capital and
8%
for total risk-based capital.
Bank
of
Camden is also required to maintain capital at a minimum level based on
quarterly average assets, which is known as the leverage ratio. Only the
strongest banks are allowed to maintain capital at the minimum requirement
of
3%. All others are subject to maintaining ratios 1% to 2% above the
minimum.
Bank
of
Camden exceeded the regulatory capital requirements at December 31, 2005 and
2004 as set forth in the following table.
December
31,
|
|
2005
|
|
2004
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Tier
1 capital
|
|
$
|
5,361
|
|
$
|
5,216
|
|
Tier
2 capital
|
|
|
305
|
|
|
266
|
|
|
|
|
|
|
|
|
|
Total
qualifying capital
|
|
$
|
5,666
|
|
|
5,482
|
|
|
|
|
|
|
|
|
|
Risk-adjusted
total assets (including off-balance-sheet exposures)
|
|
$
|
31,847
|
|
$
|
28,370
|
|
|
|
|
|
|
|
|
|
Tier
1 risk-based capital ratio
|
|
|
16.83
|
%
|
|
18.39
|
%
|
Total
risk-based capital ratio
|
|
|
17.79
|
%
|
|
19.32
|
%
|
Tier
1 leverage ratio
|
|
|
12.22
|
%
|
|
12.56
|
%
|
The
Federal Reserve has similar requirements for bank holding companies. DeKalb
was
not subject to these requirements in 2004 and 2005 because the Federal Reserve
applied its guidelines on a bank-only basis for bank holding companies with
less
than $150 million in consolidated assets.
Off-Balance
Sheet Risk
Through
its operations, DeKalb has made contractual commitments to extend credit in
the
ordinary course of its business activities. These commitments are legally
binding agreements to lend money to DeKalb’s customers at predetermined interest
rates for a specified period of time. At December 31, 2005, DeKalb had unused
commitments to extend credit of $5,450,916 and standby letters of credit of
$83,030 through various types of commercial lending arrangements. Approximately
$3,734,323 of these commitments to extend credit had variable rates. Some of
the
commitments and letters of credit are expected to expire without being drawn
upon, so the total amounts do not necessarily represent future cash
requirements.
The
following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at December 31,
2005.
|
|
|
|
After
One
|
|
After
Three
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
Through
|
|
|
|
Greater
|
|
|
|
|
|
Within
One
|
|
Three
|
|
Twelve
|
|
Within
One
|
|
Than
|
|
|
|
|
|
Month
|
|
Months
|
|
Months
|
|
Year
|
|
One
Year
|
|
Total
|
|
Form
of Commitment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused
commitments to extend credit
|
|
$
|
705,865
|
|
$
|
129,967
|
|
$
|
2,131,338
|
|
$
|
2,967,170
|
|
$
|
2,483,746
|
|
$
|
5,450,916
|
|
Standby
letters of credit
|
|
|
-
|
|
|
-
|
|
|
15,000
|
|
|
15,000
|
|
|
68,030
|
|
|
83,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
705,865
|
|
$
|
129,967
|
|
$
|
2,146,338
|
|
$
|
2,982,170
|
|
$
|
2,551,776
|
|
$
|
5,533,946
|
|
DeKalb
evaluates each customer’s creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by DeKalb upon extension of credit,
is based on its credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate.
Critical
Accounting Policies
DeKalb
has adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of its financial statements. DeKalb’s significant accounting policies are
described in the notes to the consolidated financial statements at December
31,
2005 included herein. Certain accounting policies involve significant judgments
and assumptions by management which have a material impact on the carrying
value
of certain assets and liabilities. DeKalb considers these accounting policies
to
be critical accounting policies. The judgments and assumptions management uses
are based on historical experience and other factors, which management believes
to be reasonable under the circumstances. Because of the nature of the judgments
and assumptions management makes, actual results could differ from these
judgments and estimates which could have a material impact on our carrying
values of assets and liabilities and results of operations.
Management
believes the allowance for loan losses is the critical accounting policy that
requires the most significant judgments and estimates used in preparation of
DeKalb’s consolidated financial statements. Refer to the portion of this
discussion that addresses the allowance for loan losses for a description of
the
processes and methodology for determining the allowance for loan
losses.
Liquidity
Management and Capital Resources
Liquidity
management involves monitoring DeKalb’s sources and uses of funds in order to
meet its day-to-day cash flow requirements while maximizing profits. Liquidity
represents the ability of a DeKalb to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Without proper liquidity management, DeKalb would not be able
to
perform the primary function of a financial intermediary and would, therefore,
not be able to meet the needs of the communities it serves.
Liquidity
management is made more complex because different balance sheet components
are
subject to varying degrees of management control. For example, the timing of
maturities of the investment portfolio is fairly predictable; while net deposit
inflows and outflows are far less predictable and are not subject to nearly
the
same
degree
of
control. DeKalb also has the ability to borrow funds from the Federal Home
Loan
Bank. At December 31, 2005, DeKalb’s availability to borrow funds from the
Federal Home Loan Bank totaled $9,264,983 of which DeKalb had borrowed
$7,600,000 at December 31, 2005. At December 31, 2005, DeKalb also had unused
lines of credit to purchase federal funds from other financial institutions
totaling $1,900,000.
Impact
of Inflation
Unlike
most industrial companies, the assets and liabilities of financial institutions
such as DeKalb are primarily monetary in nature. Therefore, interest rates
have
a more significant effect on DeKalb’s performance than do the effects of changes
in the general rate of inflation and changes 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, management seeks
to
manage the relationships between interest sensitive assets and liabilities
in
order to protect against wide interest rate fluctuations, including those
resulting from inflation.
The
table
below shows, as to each director and nominee, his or her name and positions
held
with DeKalb, the period during which he or she has served as a director of
DeKalb, and the number of shares of DeKalb's common stock beneficially owned
by
him or her at March 1, 2006. Except as otherwise indicated, to the knowledge
of
management, all shares are owned directly with sole voting power.
|
|
NUMBER
OF SHARES
|
%
OF SHARESOUTSTANDING
|
POSITIONS
WITH
DEKALB
|
DIRECTOR
SINCE(9)
|
|
|
|
|
|
|
|
|
|
|
Directors
whose terms of office to continue until the Annual Meeting of Shareholders
in 2008 are:
|
|
|
|
|
|
|
|
|
|
|
|
D.
Edward Baxley
|
|
|
4,101(1
|
)
|
|
0.67
|
%
|
Director
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
R. Blakely
|
|
|
23,500
|
|
|
3.85
|
%
|
Director
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Paul T. Joseph, Jr.
|
|
|
6,000(2
|
)
|
|
0.98
|
%
|
Director
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
D. King, Sr.
|
|
|
30,000(3
|
)
|
|
4.92
|
%
|
Director
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
whose terms of office continue until the Annual Meeting of Shareholders
in
2007 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anne
duPont Shirley
489
Ice House Hill Road
Rembert,
SC 29128
|
|
|
32,000
|
|
|
5.24
|
%
|
Director
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roderick
M. Todd, Jr.
|
|
|
9,437(4
|
)
|
|
1.55
|
%
|
Director
and Secretary
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
C. West, Jr.
|
|
|
16,179(5
|
)
|
|
2.65
|
%
|
Director
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
whose terms of office continue until the Annual Meeting of Shareholders
in
2006 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
C. Bochette, III
631
West DeKalb Street
Camden,
SC 29020
|
|
|
67,167(6
|
)
|
|
10.17
|
%
|
Chairman,
President,
CEO,
and Director
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
D. Riddick
|
|
|
26,967(7
|
)
|
|
4.42
|
%
|
Director
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sylvia
U. Wood
|
|
|
1,000
|
|
|
0.16
|
%
|
Director
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Directors, nominees and executive officers as a group (10
persons)
|
|
|
216,351(8
|
)
|
|
32.77
|
%
|
|
|
|
|
|
|
____________________________
(1) Includes
350 shares held in an IRA for Mr. Baxley.
(2) Includes
2,000 shares held in an IRA for Dr. Joseph and 2,500 shares held in a trust
of
which Dr. Joseph is co-trustee.
(3) Includes
30,000 shares held in an IRA for Mr. King.
(4) Includes
1,418 shares held in an IRA for Mr. Todd; 105 shares held in a trust of which
Mr. Todd is trustee; and 1,650 shares owned jointly with Mr. Todd’s
spouse.
(5) Includes
300 shares held in an IRA for Mr. West.
(6) Includes
1,760 shares owned jointly with Wendee A. Bochette, Mr. Bochette's spouse;
4,740
shares held in an IRA for Mr. Bochette; 1,500 shares owned by Mr. Bochette's
children of which Mr. Bochette is custodian; and 50,000 shares subject to
currently exercisable options.
(7) Includes
25,967 shares owned jointly with Joan H. Riddick, Mr. Riddick's
spouse.
(8) Includes
50,000 shares subject to currently exercisable options.
(9) Includes
service as a director of Bank of Camden prior to acquisition of the bank by
DeKalb.
As
used in this section of the proxy statement/prospectus, unless context requires
otherwise, the terms “company,” “bank,” “we,” and “our” refer to First Community
and its wholly owned subsidiary, First Community Bank, N.A.
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, we 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.
Our
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.
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.
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.
As
of
December 31, 2005, we had 123 full-time employees. We believe that our relations
with our employees are good.
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.
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.
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;
|
|
·
|
issuances
of securities;
|
|
·
|
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:
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·
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information
systems and audit systems;
|
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·
|
interest
rate risk exposure; and
|
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:
|
·
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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
|
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·
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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:
|
·
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the
federal Truth-In-Lending Act, governing disclosures of credit terms
to
consumer borrowers;
|
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·
|
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;
|
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·
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the
Equal Credit Opportunity Act, prohibiting discrimination on the basis
of
race, creed or other prohibited factors in extending
credit;
|
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·
|
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:
|
·
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submit
a capital restoration plan;
|
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·
|
raise
additional capital;
|
|
·
|
restrict
their growth, deposit interest rates, and other
activities;
|
|
·
|
improve
their management;
|
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·
|
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.
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.
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.
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High
|
|
Low
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended March 31, 2005
|
|
$
|
21.75
|
|
$
|
18.80
|
|
$
|
0.05
|
|
Quarter
ended June 30, 2005
|
|
$
|
20.49
|
|
$
|
16.73
|
|
$
|
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.
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
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
|
|
|
75
|
|
|
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 AUDITOR
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
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
FIRST
COMMUNITY CORPORATION
|
|
Consolidated
Statements of Income
|
|
|
|
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
|
FIRST
COMMUNITY CORPORATION
|
|
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
theweighted 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
|
|
|
|
|
|
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.
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 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. 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
|
%
|
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
|
|
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
|
%
|
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.
Quantitative
and Qualitative Disclosures About Market Risk
Please
refer to “Market Risk and Interest Rate Sensitivity,” “Loan Maturity Schedule
and Sensitivity to Changes n Interest Rates,” “Investment Securities Majority
Distribution and Yields” in the section above entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” for quantitative
and qualitative disclosures about market risk, which information is incorporated
herein by reference.
The
following table shows how much common stock in the company is owned by the
directors, executive officers, and owners of more than 5% of the outstanding
common stock, as of March 31, 2006. The mailing address for each beneficial
owner is care of First Community Corporation, 5455 Sunset Boulevard, Lexington,
South Carolina, 29072.
Name
|
Number
of
Shares
Owned(1)
|
Right
to Acquire(2)
|
%
of Beneficial
Ownership(3)
|
Richard
K. Bogan
|
3,100
|
1,312
|
.15%
|
Thomas
C. Brown
|
23,625
|
1,312
|
.86%
|
Chimin
J. Chao
|
24,239
|
1,312
|
.88%
|
Michael
C. Crapps
|
30,505
|
11,563
|
1.45%
|
Hinton
G. Davis
|
62,344
|
—
|
2.16%
|
Anita
B. Easter
|
21,655
|
1,312
|
.79%
|
O.A.
Ethridge
|
21,311
|
1,312
|
.78%
|
George
H. Fann, Jr.
|
60,506
|
—
|
2.09%
|
W.
James Kitchens, Jr.
|
9,761
|
—
|
.34%
|
J.
Thomas Johnson
|
31,248
|
69,494
|
3.40%
|
James
C. Leventis (4)
|
10,718
|
5,000
|
.54%
|
David
K. Proctor
|
17,713
|
8,937
|
.92%
|
J.
Ted Nissen
|
9,204
|
7,625
|
.58%
|
Joseph
G. Sawyer
|
12,847
|
8,937
|
.75%
|
Alexander
Snipe, Jr.
|
2,642
|
—
|
.09%
|
Loretta
R. Whitehead
|
15,750
|
—
|
.54%
|
Mitchell
M. Willoughby
|
18,375
|
1,312
|
.68%
|
|
|
|
|
All
executive officers and directors
as
a group (17
persons)
|
375,543
|
119,428
|
16.43%
|
___________________________
(1)
|
Includes
shares for which the named person has sole voting and investment
power,
has shared voting and investment power, or holds in an IRA or other
retirement plan program, unless otherwise indicated in these
footnotes.
|
(2)
|
Includes
shares that may be acquired within the next 60 days of March 31,
2006 by
exercising vested stock options but does not include any unvested
stock
options.
|
(3)
|
For
each individual, this percentage is determined by assuming the named
person exercises all options which he or she has the right to acquire
within 60 days, but that no other persons exercise any options or
warrants. For the directors and executive officers as a group, this
percentage is determined by assuming that each director and executive
officer exercises all options which he or she has the right to acquire
within 60 days, but that no other persons exercise any options. The
calculations are based on 2,893,246 shares of common stock outstanding
on
March 31, 2006.
|
(4)
Includes
4,668 shares held by an investment affiliate of Mr. Leventis.
OF
THE SURVIVING COMPANY
First
Community has scheduled its annual meeting for May 17, 2006. Assuming
shareholders elect the five nominees as Class III directors at the meeting,
the
following information describes all of the officers and directors that will
serve First Community as the surviving company. Following consummation of the
merger, First Community will also appointment one current DeKalb director that
is mutually acceptable to both parties to the board of directors of First
Community.
Richard
K. Bogan,
60,
Class I director, has served as a director of the company since its formation
in
1994. Dr. Bogan has practiced medicine in Columbia, South Carolina since he
started Pulmonary Associates of Carolina in 1978. He graduated with a B.S.
degree from Wofford College in Spartanburg in 1966 and earned an M.D. degree
from the Medical College of South Carolina in Charleston in 1970. Dr. Bogan
has been president of Bogan Consulting, Inc., a medical consulting company,
since December 1992 and holds memberships in numerous medical organizations.
He has served as medical director of Palmetto Physician Partners and president
of SCDA, a management company of sleep clinics throughout the
Southeast.
Thomas
C. Brown,
47,
Class II director, has served as a director of the company since its formation
in 1994. Since 1989, Mr. Brown has been the president and owner of T.C.B.
Enterprises of South Carolina, Inc., a restaurant business based in Myrtle
Beach. Mr. Brown graduated from Clemson University in 1981 with a B.S. degree
in
Civil Engineering. He serves part-time as an ordained minister at All Saints
Episcopal Church, Pawleys Island, South Carolina.
Chimin
J. Chao,
50,
Class III director, has served as a director of the company since its formation
in 1994. Mr. Chao lives in Lexington, South Carolina and since 1987 has been
president of the engineering firm Chao and Associates, Inc. in Irmo, South
Carolina. Mr. Chao is a member of the American Society of Engineers and the
National Society of Professional Engineers. He received a M.S. degree in
Structural Engineering at the University of South Carolina and holds a
Professional Engineer license and General Contractors license in South
Carolina.
Michael
C. Crapps,
47,
Class I director, has served as our President and Chief Executive Officer and
as
a director of the company since its formation in 1994. A lifelong Lexington
County resident, he began his banking career with South Carolina National Bank
in 1980, and by the time he changed jobs in 1985 he was a vice president and
senior commercial lender in a regional office of that bank. From 1985 to 1993,
he worked for Republic National Bank in Columbia, becoming President, chief
executive officer, and a director of that bank. During his career, Mr. Crapps
has been responsible for virtually all aspects of banking, including branches,
commercial banking, operations, credit administration, accounting, human
resources, and compliance. He also serves the banking industry through his
involvement in the South Carolina Bankers Association having served as its
Chairman and on its Board of Directors. Mr. Crapps was selected as the 1997
Young Banker of the Year by the South Carolina Bankers Association. He received
a B.S. degree in Economics in 1980 from Clemson University and an M.B.A. degree
from the University of South Carolina in 1984. Mr. Crapps is also a graduate
of
the L.S.U. Banking School of the South. Mr. Crapps is presently on the Boards
of
Directors of the South Atlantic Division of the American Cancer Society and
serves as its Vice Chairman, the Greater Columbia Community Relations Council,
the Saluda Shoals Park Foundation and the Lexington School District #1
Foundation. He is also a Past Chairman of the Lexington Chamber of
Commerce.
Hinton
G. Davis,
68,
Class I director, has served as a director of the company since its formation
in
1994. Mr. Davis is the founder and chief executive officer of Capital City
Insurance Company, Inc. and Davis Garvin Agency, Inc., an insurance company
and
insurance agency, respectively. Since founding these companies in 1981, Mr.
Davis has worked as chief executive officer and primary owner of three related
insurance businesses: Southeastern Claims Services, Inc., Capital E & S
Brokers, and Charter Premium Audits. Mr. Davis has resided in Columbia for
over
20 years and holds a B.B.A. degree in Insurance from the University of
Georgia.
Anita
B. Easter,
61,
Class I director, has served as a director of the company since its formation
in
1994. Mrs. Easter is retired. She is a former owner and director of Anchor
Continental, Inc., a manufacturer of pressure sensitive tapes. She received
a
B.S. in Nursing from the University of South Carolina in 1979. In 2003, she
completed the South Carolina Bankers Association Bank Directors College at
the
University of South Carolina. She
is
past
chair of the Greater Columbia Community Relations Council and serves on the
past
chairs’ advisory council. She is a member of Women in Philanthropy, the Columbia
Luncheon Club and the League of Women Voters.
O.A.
Ethridge, D.M.D.,
62,
Class II director, has served as a director of the company since its formation
in 1994. Dr. Ethridge currently resides in Lexington, South Carolina and has
practiced children's dentistry in West Columbia, South Carolina for more than
20
years. After graduating with a B.A. degree in Science from Erskine College
in
Due West, South Carolina in 1965, Dr. Ethridge received a D.M.D. in 1971
from the University of Louisville School of Dentistry in Louisville, Kentucky.
He became a pedodontist in 1974 after receiving a pedodontist specialty from
Children's Medical Center in Dayton, Ohio.
George
H. Fann, Jr.,
D.M.D.,
61, Class I director, has served as a director of the company since its
formation in 1994. Dr. Fann has practiced dentistry in West Columbia, South
Carolina for 34 years. He earned a B.S. degree from Clemson University in 1966
and a D.M.D. from the University of Louisville School of Dentistry in 1969.
Dr.
Fann is past chairman of the board of directors of Lexington Medical Center
in
West Columbia, South Carolina. Dr. Fann is a recipient of the Order of the
Palmetto awarded by the Governor of South Carolina.Anita B. Easter, 61, Class
I
director, has served as a director of the company since its formation in 1994.
Mrs. Easter is retired. She is a former owner and director of Anchor
Continental, Inc., a manufacturer of pressure sensitive tapes. She received
a
B.S. in Nursing from the University of South Carolina in 1979. In 2003, she
completed the South Carolina Bankers Association Bank Directors College at
the
University of South Carolina. She is past chair of the Greater Columbia
Community Relations Council and serves on the past chairs’ advisory council. She
is a member of Women in Philanthropy, the Columbia Luncheon Club and the League
of Women Voters.
J.
Thomas Johnson,
59,
Class III director, has served as Vice Chairman of the Board and Executive
Vice
President of the company since the merger with Dutch Fork BancShares in October
2004. Mr. Johnson previously served as Chairman and CEO of Dutch Fork BancShares
and Newberry Federal Savings Bank since 1984. Mr. Johnson has been in banking
since 1968. He has served as Chairman of the Community Financial Institutions
of
South Carolina and formerly served on the board of directors of the South
Carolina Bankers Association. He is a member of the board of directors of the
Federal Home Loan Bank of Atlanta representing South Carolina member banks.
He
is also Chairman of Business Carolina, a statewide economic development lender.
He received a B.S. in Marketing in 1968 from the University of South Carolina.
He currently serves on the board of visitors of the Medical University of South
Carolina; the boards of the Newberry Opera House Foundation; Newberry Chamber
of
Commerce; the Central Carolina Alliance; the Central Carolina Community
Foundation and the S.C. Independent Colleges and Universities.
W.
James Kitchens, Jr.,
44,
Class II
director, has served as a director of the company since its formation in 1994.
Mr. Kitchens is a Certified Public Accountant and holds the Chartered Financial
Analyst designation. He is the president of The Kitchens Firm, P.A., a certified
public accounting firm in Columbia. Mr. Kitchens earned a B.S. degree in
Mathematics from The University of the South and an M.B.A. degree from Duke
University.
James
C. Leventis,
68,
Class III director, Chairman of the Board, has served as Chairman of the Board
of Directors of the company since its formation in 1994. Mr. Leventis is a
shareholder of the law firm Rogers, Townsend & Thomas, PC where he has
practiced since 1996. Mr. Leventis received a J.D. degree and a B.S. degree
in
Business Administration from the University of South Carolina. Mr. Leventis
also
has extensive experience in the banking industry. From 1964 to 1968,
Mr. Leventis was a commercial lending officer with First National City Bank
of New York; from 1968 to 1974, he served as vice president and general manager
of Genway Corp., a nationwide leasing system of General Motors dealers; and
from
1985 to 1988, he served as president and chairman of Republic National Bank
in
Columbia. Mr. Leventis is also past vice chairman of the School Board of
Richland District I, a past member and former chairman of the Richland County
Council and Central Midlands Regional Planning Council, and past president
of
the Alumni Association of the University of South Carolina. He serves on the
Boards of the South Carolina State Chamber of Commerce, South Carolina Bankers
Association, Business Development Corporation, the Governor’s School for Science
and Mathematics, the Indian Waters Council and Southeastern Region Boy Scouts
of
America, the City Center Partnership of Columbia, and the Blue Ribbon Committee,
Richland County School District One.
J.
Ted Nissen,
44, has
been Senior Vice President and Group Executive of the company since July 1999.
From July 1995 to July 1999 he was a Vice President and City Executive of the
company. He is a 1984 graduate of Presbyterian College with a BS in Business
Management.
David
K. Proctor,
49, has
been the Senior Vice President/Senior Credit Officer of the company since First
Community Bank opened for business in 1995. From May 1994 to June 1995, he
was
the vice president of credit for Republic Leasing Company. From 1987 to 1994,
he
held various positions with Republic National Bank in Columbia and most recently
was executive vice president and senior credit officer. He is a 1979 graduate
of
Clemson University with a B.S. in Business Administration.
Joseph
G. Sawyer,
55, has
been Senior Vice President/Chief Financial Officer of the company since First
Community Bank opened for business in 1995. Prior to joining the company, he
was
senior vice president and general auditor for the National Bank of South
Carolina. He is a certified public accountant and a 1973 graduate of The Citadel
with a B.A. in Political Science.
Alexander
Snipe, Jr.,
55, has
served as a Class III director of our company since May 2005. Mr. Snipe has
been
the president and chief executive officer of Glory Communications, Inc. since
September 1992. Glory Communications, Inc. operates five gospel radio
stations located in South Carolina markets, including its first station, WFMV,
which began broadcasting in November 1993 in Columbia, South Carolina. Prior
to
forming Glory Communications, Inc., Mr. Snipe was the general sales manager
at a
radio station for 10 years. He has over 20 years of broadcasting
experience. Mr. Snipe serves on the board of the William L. Bonner Bible
College, The National Association of Broadcasters Radio Board, The Radio Board's
Membership Committee (chairman), and The Gospel Heritage Foundation. Mr. Snipe
is a former board member of the Columbia Urban League and The Gospel Music
Association, and he is Past President of the South Carolina Broadcasters
Association.
Loretta
R. Whitehead,
63,
Class III director, has served as a director of the company since its formation
in 1994. Ms. Whitehead has been a realtor since 1981 and is currently a broker
with RE/MAX Real Estate Services in Columbia, South Carolina. She taught
full-time from 1964 through 1968 after receiving a B.A. degree in English and
Elementary Education from Columbia College in 1963. She is a board member of
the
Lexington Medical Center Foundation. She also took additional graduate work
at
the University of South Carolina and University of Tennessee from 1963 through
1968.
Mitchell
M. Willoughby,
58,
Class II director, has served as a director of the company since its formation
in 1994. Mr. Willoughby has lived in Columbia, South Carolina since 1970 and
practiced law since 1975. He is currently a founding member of the law firm
Willoughby & Hoefer, P.A. Mr. Willoughby formerly served as general counsel
to the Greater Columbia Chamber of Commerce and serves in the South Carolina
Army National Guard with the rank of Brigadier General. He received a B.S.
degree in 1969 from Clemson University and a J.D. degree from the University
of
South Carolina in 1975.
Audit
Committee
The
audit
committee of First Community is composed of Dr. Ethridge, Mr. Kitchens, Mr.
Willoughby, Ms. Whitehead, and Ms. Easter. The
board
of directors has determined that all members are independent, as contemplated
in
the listing standards of the NASD and The NASDAQ Capital Market.
Our
board has determined that Mr. Kitchens, who was appointed to the audit committee
on March 16, 2004, qualifies as an audit committee financial expert under the
SEC rules. The audit committee met four times in 2005.
Executive
Compensation
The
following table shows the compensation we paid for the years ended December
31,
2003 through 2005 to First Community’s chief executive officer and president and
for the five most highly compensated other executive officers who earned over
$100,000 for the year ended 2005 (collectively, the “named executive officers”).
Summary
Compensation Table
|
Annual
Compensation(1)
|
Long
Term
Compensation
Awards
|
All
Other
Compensation(2)
|
Name
and
Principal
Position
|
Year
|
Securities
Underlying
Options (#)
|
Salary
|
Bonus
|
|
|
|
|
|
|
Michael
C. Crapps
President
and CEO
|
2005
2004
2003
|
$200,515
162,346
146,879
|
$25,487
36,733
27,548
|
5,000
—
—
|
$7,795
9,534
8,730
|
|
|
|
|
|
|
David
K. Proctor
Senior
Vice President,
Senior
Credit Officer
|
2005
2004
2003
|
109,375
102,125
95,938
|
13,720
23,063
17,726
|
5,000
—
—
|
3,420
6,114
5,870
|
|
|
|
|
|
|
Joseph
G. Sawyer
Senior
Vice President
Chief
Financial Officer
|
2005
2004
2003
|
118,542
102,208
96,981
|
15,000
23,063
17,907
|
5,000
—
—
|
3,556
5,995
5,882
|
|
|
|
|
|
|
J.
Ted Nissen
Senior
Vice President
Group
Executive
|
2005
2004
2003
|
109,042
98,750
86,308
|
13,750
22,163
16,406
|
5,000
__
__
|
3,834
6,239
5,223
|
|
|
|
|
|
|
J.
Thomas Johnson
Executive
Vice President
Vice
Chairman of the Board
|
2005
2004
2003
|
176,367
43,750
—
|
22,045
—
—
|
—
—
—
|
5,291
3,192
—
|
|
|
|
|
|
|
Steve
P. Sligh
Senior
Vice President
|
2005
2004
2003
|
147,877
43,750
—
|
—
—
—
|
—
__
__
|
—
1,588
—
|
_____________________________
|
(1)
|
Our
executive officers also receive indirect compensation in the form
of
certain perquisites and other personal benefits. The amount of such
benefits received in the fiscal year by the named executive officer
did
not exceed the lesser of $50,000 or 10% of the executive’s annual salary
and bonus.
|
|
(2)
|
Includes
company
to our 401(k))
plan for each officer. For Mr. Crapps, includes $6,015 company
contribution to 401(k) plan and $1,780 for premiums paid on term
life
insurance policy.
|
Option
Grants in Last Fiscal Year
The
following table sets forth information concerning the grant of stock options
to
our named executive officers during the year ended December 31,
2005.
|
|
|
|
|
|
|
|
|
Potential
|
|
|
|
|
|
|
|
|
|
RealizableValue
|
|
|
|
|
|
|
|
|
|
At
Assumed Rates
|
|
|
|
|
|
|
|
|
|
of
Stock Price
|
|
|
Number
of Securities
|
|
Percent
of Total
|
|
Exercise
|
|
|
Appreciation
for
|
|
|
Underlying
Options
|
|
Granted
to Employees
|
|
Price
|
|
Expiration
|
Option
Term (10 yrs)
|
|
|
Granted
|
|
in
Fiscal Year
|
|
($
per Share)
|
|
Date
|
|
5%
$(2)
|
|
10%
$ (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
C. Crapps
|
|
5,000
|
|
7.8%
|
|
$20.20
|
|
01/19/2015
|
|
63,518
|
|
160,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J.
Ted Nissen
|
|
5,000
|
|
7.8%
|
|
$20.20
|
|
01/19/2015
|
|
63,518
|
|
160,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
K. Proctor
|
|
5,000
|
|
7.8%
|
|
$20.20
|
|
01/19/2015
|
|
63,518
|
|
160,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
G. Sawyer
|
|
5,000
|
|
7.8%
|
|
$20.20
|
|
01/19/2015
|
|
63,518
|
|
160,968
|
|
__________________________
(1)
|
The
exercise price equals the market price of the company’s common stock on
the date of the grant.
|
(2)
|
The
potential gains are based on the assumed annual rates of stock price
appreciation of 5% and 10% over the term of each option. Any actual
gains
are dependent on the future performance of our common stock and general
market conditions. There is no assurance that the assumed rates of
stock
price appreciation will be achieved. Increases in the stock price
will
benefit all shareholders
commensurately.
|
In
2005,
in addition to the options shown in the above table, we also granted 38,500
options to employees pursuant to the First Community Corporation 1999 Stock
Incentive Plan, approved by our board of directors and shareholders. Currently,
there are a total of 147,047 options covered by the 1999 Stock Incentive Plan,
including 147,047 options that have been granted and are currently outstanding.
In addition, there are 180,625 options outstanding which were acquired in the
DutchFork merger transaction.
Aggregated
Option Exercises and Year-End Option Values
Name
|
|
|
Number
of Unexercised Securities
Underlying
Options at Fiscal Year
End(#)(1)
Exercisable/Unexercisable
|
Value
of Unexercised In-the-
Money
Options at
Fiscal
Year End ($)(2)
Exercisable/Unexercisable
|
|
|
|
|
|
Michael
C. Crapps
|
|
|
11,563/11,563
|
$29,534/$0
|
|
|
|
|
|
David
K. Proctor
|
|
|
8,937/8,937
|
$17,719/$0
|
|
|
|
|
|
Joseph
G. Sawyer
|
|
|
8,937/8,937
|
$17,719/$0
|
|
|
|
|
|
J.
Ted Nissen
|
|
|
7,625/7,625
|
$11,812/$0
|
|
|
|
|
|
J.
Thomas Johnson (3)
|
|
|
69,494/69,494
|
$644,209/$0
|
_______________
(1) The
numbers have been adjusted to reflect all stock dividends and stock
splits.
(2) The
values shown equal the difference between the exercise price of unexercised
in-the-money options and the closing market price $18.50 of the underlying
common stock at December 31, 2005. Options are in-the-money if the fair market
value of the common stock exceeds the exercise price of the option.
(3) Options
were issued in connection with the DutchFork merger transaction.
Employment
Agreements
Michael
C. Crapps and James C. Leventis.
Upon
its formation, the company entered into employment agreements with Michael
C.
Crapps, as the President and Chief Executive Officer of the company, and James
C. Leventis, as the Chairman of the Board of the company. Both employment
agreements provided for an initial term of three years, to be extended
automatically each day for an additional day so that the remaining term of
the
agreement will continue to be three years. The term may be fixed at three years
without additional extension by notice of either party to the other. The term
of
each agreement is currently three years. The agreement with Mr. Crapps provided
for a starting annual salary of $90,000, and the agreement with Mr. Leventis
provided for an annual salary of $25,000 per year, and the amounts have been
reviewed annually by the board of directors and increased from time to time
based on the board’s recommendation. Both Mr. Crapps and Mr. Leventis are also
eligible to receive annual payments based upon achievement criteria established
by the board of directors. Since the company’s formation through 2002, Mr.
Leventis devoted approximately 25% of his time to the company. In 2003, Mr.
Leventis began devoting a greater percentage of his time to the company
(currently approximately 75% of his time), and the company increased his salary
proportionately.
Both
agreements provide that if the company terminates the
executive’s employment without cause or if the executive’s employment is
terminated due to a sale, merger, or dissolution of the company or First
Community Bank, the company will be obligated to continue his salary and bonus
for the first 12
months
thereafter plus one-half of his salary and bonus for the second 12
months
thereafter. Furthermore, the company must remove any restrictions on outstanding
incentive awards so that all such awards vest immediately and the company must
continue to provide his life insurance and medical benefits until he reaches
the
age of 65.
In
addition, both employment agreements provide that following termination of
the
executive’s employment with the company and for a period of 12
months
thereafter, the executive may not (i) be employed in the banking business
as a director, officer at the vice president level or higher, or organizer
or
promoter of, or provide executive management services to, any financial
institution within Richland
or
Lexington counties, (ii) solicit major customers of the company for the
purpose of providing financial services, or (iii) solicit employees of the
company for employment.
David
K. Proctor and Joseph G. Sawyer.
The
company has entered into employment agreements with David K. Proctor, as Senior
Vice President and Senior Credit Officer, and Joseph G. Sawyer, as Senior Vice
President and Chief Financial Officer. Both employment agreements provide for
an
initial term of three years, to be extended automatically each day for an
additional day so that the remaining term of the agreement will continue to
be
three years. The term may be fixed at three years without extension by notice
of
either party to the other.
Both
agreements provide that if the company terminates the executive’s employment
without cause the company shall be obligated to pay the employee compensation
in
an amount equal to 100% of his then current monthly base salary each month
for
three months from the date of termination, plus any bonus earned or accrued
through the date of termination. If the executive terminates his employment
or
the company terminates the executive’s employment after a change in control
without cause, the company will pay the employee an amount equal to two times
the then current annual base salary. In addition, the company will pay the
employee any bonus earned or accrued through the date of termination. The
company will remove any restrictions on outstanding incentive awards so that
all
such awards vest immediately. The company must continue to pay at its expense
medical and life insurance benefits for a period of two years after
termination.
In
addition, each agreement provides that during the employee’s employment and for
a period of 12 months thereafter, the employee may not (without prior written
consent of the company) compete with the company or any of its affiliates by,
directly or indirectly, forming, serving as an organizer, director or officer
of, or consultant to, or acquiring or maintaining more than a 1% passive
investment in, a financial institution which has one or more offices or branches
located within a radius of 10 miles
from the bank’s main office or any of its branch offices. This restriction does
not apply after a change in control.
J.
Thomas Johnson.
In
connection with our merger with DutchFork, J. Thomas Johnson, President and
Chief Executive Officer of DutchFork, entered into a new employment, consulting,
and noncompete agreement with First Community Bank effective on the closing
date
of the merger. As a result of terminating his existing
employment
agreement in connection with the merger, Mr. Johnson a received lump sum payment
of $863,298. Under the new agreement, Mr. Johnson agreed to serve as Executive
Vice Presidents of First Community Bank for a period of three years and paid
an
annual salary of $175,000. Upon termination of employment, Mr. Johnson agreed
to
provide consulting services to First Community and First Community Bank for
two
years in exchange for an annual salary of $172,500. At the end of the consulting
period, First Community Bank will pay Mr. Johnson $150,000 per year for a
three-year period for complying with certain restrictive covenants. During
the
term of the agreement, First Community Bank has agreed to procure and maintain
a
life insurance policy, with certain limitations, on Mr. Johnson with death
benefits payable to First Community Bank in an amount that approximates the
total payments due to the executives during the consulting period and the
restricted period if the consulting services were performed and the restrictive
covenants were honored in their entirety.
The
agreement provides that during the employment term, consulting period, and
for a
period of 36 months thereafter, the employee may not (without prior written
consent of the company) compete with us by, directly or indirectly, forming,
serving as an organizer, director or officer of, or consultant to, or acquiring
or maintaining more than a 1% passive investment in, a financial institution
which has one or more offices or branches located within a radius of
3 miles
from the bank’s main office or any of its branch offices. In
addition, the agreement provides that during this restricted period, the
employee may not solicit
our customers or employees.
The
agreement also provides that if we terminate without
cause, we will be obligated to pay Mr. Johnson an amount equal to his base
salary for the remainder of the employment term, consulting period, and
restrictive covenant period.
Director
Compensation
During
the year ended December 31, 2005, outside directors received a retainer in
the
amount of $5,000 and fees of $150 for attendance at each committee meeting
and
$500 for attendance at each board meeting.
Certain
Relationships and Related Transactions
First
Community makes loans and enters into other transactions in the ordinary course
of business with its directors and officers and their affiliates. It is the
company’s policy that these loans and other transactions be on substantially the
same terms (including price or interest rates and collateral) as those
prevailing at the time for comparable transactions with unrelated parties.
First
Community does not expect these transactions to involve more than the normal
risk of collectibility nor present other unfavorable features to the company.
Loans to individual directors and officers must also comply with the company’s
lending policies and statutory lending limits, and directors with a personal
interest in any loan application are excluded from the consideration of the
loan
application. The company’s policy is that all of its transactions with its
affiliates will be on terms no less favorable to the company than could be
obtained from an unaffiliated third party and will be approved by a majority
of
disinterested directors.
The
validity of the shares of First Community common stock to be issued in
connection with the merger will be passed upon for First Community by Nelson
Mullins Riley & Scarborough LLP, Greenville, South Carolina. In addition,
Nelson Mullins Riley & Scarborough LLP will deliver an opinion concerning
federal income tax consequences of the merger.
The
DeKalb board of directors does not know of any matters to be presented at the
special meeting other than the proposal to approve the merger and the proposal
to approve the authorization to adjourn. If any other matters are properly
brought before the special meeting or any adjournment of the special meeting,
the enclosed proxy will be deemed to confer discretionary authority on the
individuals named as proxies to vote the shares represented by the proxy as
to
any such matters.
First
Community filed a registration statement on Form S-4 to register the issuance
of
First Community common stock to DeKalb shareholders in the merger. This proxy
statement/prospectus is a part of that registration statement and constitutes
a
prospectus of First Community and a proxy statement of DeKalb for DeKalb’s
special meeting of shareholders.
First
Community files reports, proxy statements, and other information with the SEC.
You may inspect or copy these materials at the Public Reference Room at the
SEC
at Room 1580, 100 F. Street, N.E., Washington, D.C. 20549. Please call the
SEC
at 1-800-SEC-0330 for further information on the operation of the SEC public
reference room. First Community’s public filings are also available to the
public from commercial document retrieval services and at the Internet web
site
maintained by the SEC at http://www.sec.gov.
When
deciding how to cast your vote, you should rely only on the information
contained in this proxy statement/prospectus. We have not authorized anyone
to
provide you with information that is different from what is contained in this
proxy statement/prospectus. This proxy statement/prospectus is dated , 2006.
You
should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than such date, and
neither the mailing of the proxy statement/prospectus to shareholders nor the
issuance of First Community common stock shall create any implication to the
contrary.
This
proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this proxy
statement/prospectus, or the solicitation of a proxy, in any jurisdiction to
or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither
the
delivery of this proxy statement/prospectus nor any distribution of securities
pursuant to this proxy statement/prospectus, under any circumstances, creates
any implication that there has been no change in the information set forth
or
incorporated into this proxy statement/prospectus by reference or in our affairs
since the date of this proxy statement/prospectus. The information contained
in
this proxy statement/prospectus with respect to First Community was provided
by
First Community and the information contained in this proxy statement/prospectus
with respect to DeKalb was provided by DeKalb.
Part
II - Information Not Required in Prospectus
Item
20. Indemnification of Directors and Officers
The
articles of incorporation of First Community contain a conditional provision
which, subject to certain exceptions described below, eliminates the liability
of a director to the company or its shareholders for monetary damages for breach
of the duty of care or any other duty as a director. This provision does not
eliminate such liability to the extent the director engaged in willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law, including, without limitation, laws proscribing insider trading
or manipulation of the market for any security.
The
bylaws of First Community require the company to indemnify any person who was,
is, or is threatened to be made a named defendant or respondent in any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, by reason of service by such person
as a director of the company or its subsidiary bank or any other corporation
which he served as such at the request of the company. Except as noted in the
next paragraph, directors are entitled to be indemnified against judgments,
penalties, fines, settlements, and reasonable expenses actually incurred by
the
director in connection with the proceeding. Directors are also entitled to
have
the company advance any such expenses prior to final disposition of the
proceeding, upon delivery of a written affirmation by the director of his good
faith belief that the standard of conduct necessary for indemnification has
been
met and a written undertaking to repay the amounts advanced if it is ultimately
determined that the standard of conduct has not been met.
Under
the
bylaws, indemnification will be disallowed if it is established that the
director (i) appropriated, in violation of his duties, any business opportunity
of the company, (ii) engaged in willful misconduct or a knowing violation of
law, (iii) permitted any unlawful distribution, or (iv) derived an improper
personal benefit. In addition to the bylaws, Section 33-8-520 of the South
Carolina Business Corporation Act of 1988 (the "Corporation Act") requires
that
"a corporation indemnify a director who was wholly successful, on the merits
or
otherwise, in the defense of any proceeding to which he was a party because
he
is or was a director of the corporation against reasonable expenses incurred
by
him in connection with the proceeding." The Corporation Act also provides that
upon application of a director a court may order indemnification if it
determines that the director is entitled to such indemnification under the
applicable standard of the Corporation Act.
The
board
of directors also has the authority to extend to officers, employees and agents
the same indemnification rights held by directors, subject to all of the
accompanying conditions and obligations. The board of directors has extended
or
intends to extend indemnification rights to all of its executive
officers.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling First Community
pursuant to the provisions discussed above, First Community has been informed
that in the opinion of the SEC, such indemnification is against public policy
as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
Item
21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number
|
Description
of Exhibit
|
|
|
2.1
|
Agreement
and Plan of Merger by and between First Community Corporation and
DeKalb
Bancshares, Inc. dated as of January 19, 2006 (included as Appendix
A to
the Proxy Statement/Prospectus)
|
|
|
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
of First Community (incorporated by reference to Exhibit 3.2 to
First
Community Registration Statement No. 33-86258 on Form
S-1)
|
|
|
4.1
|
Provisions
in First Community’s Articles of Incorporation and Bylaws defining the
rights of holders of First Community’s Common Stock (incorporated by
reference to Exhibit 4.1 to First Community’s Registration Statement No.
33-86258 on Form S-1)
|
|
|
5.1
|
Opinion
of Nelson Mullins Riley & Scarborough LLP regarding the legality of
securities being registered (to be filed by amendment)
|
|
|
8.1
|
Tax
Opinion of Nelson Mullins Riley & Scarborough LLP (to be filed by
amendment)
|
|
|
10.1
|
Employment
Agreement dated June 1, 1994, by and between Michael C. Crapps
and First
Community (incorporated by reference to Exhibit 10.1 to First Community’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 First
Community (incorporated by reference to Exhibit 10.2 to First Community’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 First Community’s 1998 Annual
Report and Form 10-KSB)
|
|
|
10.5
|
Employment
Agreement dated September 2, 2002 by and between David K. Proctor
and
First Community (incorporated by reference to Exhibit 10.4 to First
Community’s 2002 Annual Report and Form 10-KSB)
|
|
|
10.6
|
Employment
Agreement dated June 12, 2002 by and between Joseph G. Sawyer and
First
Community (incorporated by reference to Exhibit 10.5 to First Community’s
2002 Annual Report and Form 10-KSB)
|
|
|
10.7
|
First
Amendment to the First Community Corporation 1999 Stock Incentive
Plan
(incorporated by reference to Exhibit 10.7 to First Community’s 2005
Annual Report and Form 10-KSB)
|
|
|
10.8
|
Agreement
between First Community Bank and Summerfield Associates, Inc. dated
June 28, 2005 (incorporated by reference to Exhibit 10.1 to First
Community Form 10-Q 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 First Community (incorporated by reference to Exhibit 21.1 to
the
company’s Form 10-K for the year ended December 31,
2005)
|
|
|
23.1
|
Consent
of Clifton D. Bodiford, CPA (filed herewith)
|
|
|
23.2
|
Consent
of Elliott Davis, LLC (filed herewith)
|
|
|
23.3
|
Consent
of Nelson Mullins Riley & Scarborough LLP (included with Exhibit 5.1
hereto)
|
|
|
23.4
|
Consent
of The Orr Group (filed herewith)
|
|
|
24.1
|
Power
of Attorney (contained on signature page hereof)
|
|
|
99.1
|
DeKalb’s
Form of Proxy (to be filed by
amendment)
|
____________________________
(b) Financial
Statement Schedules.
Schedules
are omitted because they are not required or are not applicable, or the required
information is shown in the financial statements or notes thereto.
Item
22. Undertakings
(a)
|
The
undersigned registrant hereby undertakes:
|
|
|
|
|
|
(1)
|
To
file, during any period in which it offers or sales of securities,
a
post-effective amendment to this registration
statement:
|
|
|
|
|
|
|
(i)
|
to
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933;
|
|
|
|
|
|
|
(ii)
|
to
reflect in the prospectus any facts or events arising after the
effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent
a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may
be
reflected in the form of prospectus filed with the Commission pursuant
to
Rule
424(b)
if, in the aggregate, the changes in volume and price represent
no more
than 20% change in the maximum aggregate offering price set forth
in the
"Calculation of Registration Fee" table in the effective registration
statement; and
|
|
|
|
|
|
|
(iii)
|
to
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement.
|
|
|
|
|
|
(2)
|
That,
for the purpose of determining any liability under the Securities
Act of
1933, each such post-effective amendment shall be deemed to be
a new
registration statement relating to the securities offered therein,
and the
offering of such securities at that time shall be deemed to be
the initial
bona fide offering thereof.
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(3)
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To
remove from registration by means of a post-effective amendment
any of the
securities being registered which remain unsold at the termination
of the
offering.
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(4)
|
That,
for the purpose of determining liability of the registrant under
the
Securities Act of 1933 to any purchaser, if the registrant is subject
to
Rule 430C, each prospectus filed pursuant to Rule 424(b) as part
of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed
in
reliance on Rule 430A, shall be deemed to be part of and included
in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement
or made
in a document incorporated or deemed incorporated by reference
into the
registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale
prior to
such first use, supersede or modify any statement that was made
in the
registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such
date of
first use.
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(5)
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That,
for the purpose of determining liability of the registrant under
the
Securities Act of 1933 to any purchaser in the initial distribution
of the
securities: The undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant to
this
registration statement, regardless of the underwriting method used
to sell
the securities to the purchaser, if the securities are offered
or sold to
such purchaser by means of any of the following communications,
the
undersigned registrant will be a seller to the purchaser and will
be
considered to offer or sell such securities to such
purchaser:
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i.
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Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
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ii.
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Any
free writing prospectus relating to the offering prepared by or
on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
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iii.
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The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant
or its
securities provided by or on behalf of the undersigned registrant;
and
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iv.
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Any
other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
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(b)
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The
undersigned registrant hereby undertakes that, for purposes of
determining
any liability under the Securities Act of 1933, each filing of
the
registrant's annual report pursuant to section 13(a) or section
15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each
filing of
an employee benefit plan's annual report pursuant to section 15(d)
of the
Securities Exchange Act of 1934) that is incorporated by reference
in the
registration statement shall be deemed to be a new registration
statement
relating to the securities offered therein, and the offering of
such
securities at that time shall be deemed to be the initial bona
fide
offering thereof.
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(1)
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The
undersigned registrant hereby undertakes as follows: That prior
to any
public reoffering of the securities registered hereunder through
use of a
prospectus which is a part of this registration statement, by any
person
or party who is deemed to be an underwriter within the meaning
of
Rule
145(c),
the issuer undertakes that such reoffering prospectus will contain
the
information called for by the applicable registration form with
respect to
reofferings by persons who may be deemed underwriters, in addition
to the
information called for by the other Items of the applicable form.
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(2)
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(d)
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The
undersigned registrant hereby undertakes to respond to requests
for
information that is incorporated by reference into the prospectus
pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business
day of
receipt of such request, and to send the incorporated documents
by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the
registration statement through the date of responding to the
request.
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(e)
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The
undersigned registrant hereby undertakes to supply by means of
a
post-effective amendment all information concerning a transaction,
and the
company being acquired involved therein, that was not the subject
of and
included in the registration statement when it became
effective.
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SIGNATURES
Pursuant
to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Lexington, State of South Carolina, on March
22,
2006.
|
FIRST COMMUNITY
CORPORATION |
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By:
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/s/
Michael C. Crapps |
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Michael C. Crapps |
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President and Chief Executive
Officer |
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We,
the
undersigned officers and directors of First Community Corporation hereby
severally and individually, constitute and appoint Michael C. Crapps and Joseph
G. Sawyer, the true and lawful attorneys-in-fact and agents (with full power
of
substitution in each case) of each of us to execute, in the name, place and
stead of each of us (individually and in any capacity stated below), any and
all
amendments to this registration statement and all instruments necessary or
advisable in connection therewith, and to file the same with the SEC, said
attorneys-in-fact and agents to have power to act and to have full power and
authority to do and perform, in the name and on behalf of each of the
undersigned, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as any of the undersigned
might or could do in person and we hereby ratify and confirm our signatures
as
they may be signed by or said attorneys-in-fact and agents to any and all such
amendments and instruments. Pursuant to the requirements of the Securities
Act
of 1933, this registration statement has been signed by the following in the
capacities and on the dates indicated.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE
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CAPACITY
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DATE
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/s/
Richard K. Bogan
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Director
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March
22, 2006
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Richard
K. Bogan
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/s/
Thomas C. Brown
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Director
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March
22, 2006
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Thomas
C. Brown
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/s/
Chimin J. Chao
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Director
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March
22, 2006
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Chimin
J. Chao
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/s/
Michael C. Crapps
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Director,
President,
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March
22, 2006
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Michael
C. Crapps
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&
Chief Executive Officer
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/s/
Anita B. Easter
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Director
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March
22, 2006
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Anita
B. Easter
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/s/
Hinton G. Davis
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Director
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March
22, 2006
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Hinton
G. Davis |
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/s/
O. A. Ethridge
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Director
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March
22, 2006
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O.
A. Ethridge
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/s/
George
H. Fann, Jr.
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Director
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March
24, 2006
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George
H. Fann, Jr.
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/s/
J.
Thomas Johnson
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Director
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J.
Thomas Johnson
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/s/
W. James Kitchens, Jr.
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Director
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March
22, 2006
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W.
James Kitchens, Jr.
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/s/
James C. Leventis
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Director,
Chairman of the
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March
23, 2006
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James
C. Leventis
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Board,
& Secretary
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/s/
Joseph G. Sawyer
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Chief
Financial Officer
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March
22, 2006
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Joseph
G. Sawyer
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and
Principal Accounting Officer
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/s/
Alexander Snipe, Jr.
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Director
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March
22, 2006
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Alexander
Snipe, Jr.
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/s/
Loretta R. Whitehead
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Director
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March
22, 2006
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Loretta
R. Whitehead
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/s/
Mitchell M. Willoughby
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Director
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March
23, 2006
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Mitchell
M. Willoughby
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Exhibit
Index
2.1
|
Agreement
and Plan of Merger by and between First Community Corporation and
DeKalb
Bancshares, Inc. dated as of January 19, 2006 (included as Appendix
A to
the Proxy Statement/Prospectus)
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3.1
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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).
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3.2
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Bylaws
of First Community (incorporated by reference to Exhibit 3.2 to
First
Community Registration Statement No. 33-86258 on Form
S-1)
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4.1
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Provisions
in First Community’s Articles of Incorporation and Bylaws defining the
rights of holders of First Community’s Common Stock (incorporated by
reference to Exhibit 4.1 to First Community’s Registration Statement No.
33-86258 on Form S-1)
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5.1
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Opinion
of Nelson Mullins Riley & Scarborough LLP regarding the legality of
securities being registered (to be filed by amendment)
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8.1
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Tax
Opinion of Nelson Mullins Riley & Scarborough LLP (to be filed by
amendment)
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10.1
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Employment
Agreement dated June 1, 1994, by and between Michael C. Crapps
and First
Community (incorporated by reference to Exhibit 10.1 to First Community’s
Registration Statement No. 33-86258 on Form S-1)
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|
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10.2
|
Employment
Agreement dated June 1, 1994, by and between James C. Leventis
and First
Community (incorporated by reference to Exhibit 10.2 to First Community’s
Registration Statement No. 33-86258 on Form S-1)
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10.3
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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).
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10.4
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First
Community Corporation 1999 Stock Incentive Plan and Form of Option
Agreement (incorporated by reference to First Community’s 1998 Annual
Report and Form 10-KSB)
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10.5
|
Employment
Agreement dated September 2, 2002 by and between David K. Proctor
and
First Community (incorporated by reference to Exhibit 10.4 to First
Community’s 2002 Annual Report and Form 10-KSB)
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10.6
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Employment
Agreement dated June 12, 2002 by and between Joseph G. Sawyer and
First
Community (incorporated by reference to Exhibit 10.5 to First Community’s
2002 Annual Report and Form 10-KSB)
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10.7
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First
Amendment to the First Community Corporation 1999 Stock Incentive
Plan
(incorporated by reference to Exhibit 10.7 to First Community’s 2005
Annual Report and Form 10-KSB)
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10.8
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Agreement
between First Community Bank and Summerfield Associates, Inc. dated
June 28, 2005 (incorporated by reference to Exhibit 10.1 to First
Community Form 10-Q filed on August 15, 2005)
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10.9
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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).
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10.10
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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).
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10.11
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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).
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10.12
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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).
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21.1
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Subsidiaries
of First Community (incorporated by reference to Exhibit 21.1 to
the
company’s Form 10-K for the year ended December 31,
2005)
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Consent
of Clifton D. Bodiford, CPA (filed herewith)
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Consent
of Elliott Davis, LLC (filed herewith)
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23.3
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Consent
of Nelson Mullins Riley & Scarborough LLP (included with Exhibit 5.1
hereto)
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Consent
of The Orr Group (filed herewith)
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24.1
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Power
of Attorney (contained on signature page hereof)
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99.1
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DeKalb’s
Form of Proxy (to be filed by
amendment)
|
By
And Between
FIRST
COMMUNITY CORPORATION
(Buyer)
and
DEKALB
BANKSHARES, INC.
(Seller)
Dated
as of
January
19, 2006
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Page
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A-5
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A-6
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A-6
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A-6
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A-6
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A-6
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A-7
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A-7
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A-7
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A-7
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A-7
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A-7
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A-8
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A-8
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A-9
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A-10
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A-10
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A-11
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A-11
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A-11
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A-11
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A-12
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A-12
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A-12
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A-13
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A-13
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A-14
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A-15
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A-16
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A-16
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A-18
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A-19
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A-20
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A-20
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A-21
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A-22
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A-23
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A-26
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A-26
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A-27
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A-27
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A-27
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A-28
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A-28
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A-29
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A-63
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A-63
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Exhibit
|
|
Description
|
|
|
|
A
|
|
Form
of Bank Plan of Merger
|
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B
|
|
Form
of Support Agreement
|
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C
|
|
Form
of Employment Agreement of William C. Bochette, III
|
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D
|
|
Form
of Affiliate Agreement
|
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E
|
|
Form
of Claims Letter
|
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F
|
|
Form
of Seller’s Legal Opinion
|
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G
|
|
Form
of Buyer’s Legal Opinion
|
THIS
AGREEMENT AND PLAN OF MERGER
(this
“Agreement”)
dated
as of January 19, 2006 is by and between First Community Corporation, a South
Carolina corporation (“Buyer”),
and
DeKalb Bankshares, Inc., a South Carolina corporation (“Seller”).
This
Agreement provides for the merger of Seller with and into Buyer (the
“Merger”).
At
the effective time of the Merger, the outstanding shares of the capital stock
of
Seller shall be converted into the right to receive shares of the common stock
of Buyer and cash (as provided herein and subject to certain terms and
conditions). As a result, shareholders of Seller shall become shareholders
of
Buyer. The transaction described in this Agreement is subject to the approvals
of the shareholders of Seller, regulatory agencies, and the satisfaction of
certain other conditions described in this Agreement. It is the intention of
the
parties to this Agreement that the Merger for federal income tax purposes shall
qualify as a “reorganization” within the meaning of Section 368(a) of the
Internal Revenue Code of 1986.
Certain
terms used in this Agreement are defined in Section 10.1 of this Agreement.
NOW,
THEREFORE,
in
consideration of the above and the mutual warranties, representations,
covenants, and agreements set forth herein, and other good and valuable
consideration and the receipt and sufficiency of which are acknowledged, the
Parties, intending to be legally bound, agree as follows:
TRANSACTIONS
AND TERMS OF MERGER
Subject
to the terms and conditions of this Agreement, at the Effective Time, Seller
shall be merged with and into Buyer pursuant to and with the effect provided
in
Section 33-11-106 of the SCBCA, and Buyer shall be the Surviving Corporation
resulting from the Merger and shall continue to be governed by the Laws of
the
State of South Carolina. The Merger shall be consummated pursuant to the terms
of this Agreement, which has been approved and adopted by the respective Boards
of Directors of Seller and Buyer.
The
closing of the transactions contemplated hereby (the “Closing”)
will
take place at 9:00 A.M. Eastern Time on the date that the Effective Time occurs
(or the immediately preceding day if the Effective Time is earlier than 9:00
A.M. Eastern Time), or at such other time as the Parties, acting through their
authorized officers, may mutually agree. The Closing shall be held at such
location as may be mutually agreed upon by the Parties and may be effected
by
electronic or other transmission of signature pages, as mutually agreed
upon.
The
Merger and other transactions contemplated by this Agreement shall become
effective on the date and time the Articles of Merger (the “Articles
of Merger”)
reflecting the Merger shall be filed and become effective with the South
Carolina Secretary of State (the “Effective
Time”).
Subject to the terms and conditions hereof, unless otherwise mutually agreed
upon in writing by the authorized officers of each Party, the Parties shall
use
their reasonable efforts to cause the Effective Time to occur within five
business days of the last of the following dates to occur: (i) the
effective date (including expiration of any applicable waiting period) of the
last required Consent of any Regulatory Authority having authority over and
approving or exempting the Merger, and (ii) the date on which the
shareholders of Seller approve this Agreement to the extent such approval is
required by applicable Law; provided, however, that in no event shall the
Effective Time occur before February 21, 2006.
Buyer
shall have the right to revise the structure of the Merger contemplated by
this
Agreement by merging Seller with and into a wholly-owned subsidiary of Buyer,
provided,
that
no such
revision to the structure of the Merger (i) shall result in any changes in
the
amount or type of the consideration which the holders of shares of Seller Common
Stock or Seller Options are entitled to receive under this Agreement,
(ii) would unreasonably impede or delay consummation of the Merger, or
(iii) imposes any less favorable terms or conditions on Bank or Seller. Buyer
may request such consent by giving written notice to Seller in the manner
provided in Section 10.8, which
notice shall be in the form of an amendment to this Agreement or in the form
of
a proposed amendment to this Agreement or in the form of an Amended and Restated
Agreement and Plan of Merger, and the addition of such other exhibits hereto
as
are reasonably necessary or appropriate to effect such change.
TERMS
OF MERGER
The
Articles of Incorporation of Buyer in effect immediately prior to the Effective
Time shall be the Articles of Incorporation of the Surviving Corporation until
otherwise duly amended or repealed.
The
Bylaws of Buyer in effect immediately prior to the Effective Time shall be
the
Bylaws of the Surviving Corporation until otherwise duly amended or repealed.
(a) The
directors of Buyer in office immediately prior to the Effective Time, together
with such additional persons as may thereafter be elected, shall serve as the
directors of the Surviving Corporation from and after the Effective Time in
accordance with the Surviving Corporation’s Bylaws, until the earlier of their
resignation or removal or otherwise ceasing to be a director. Immediately prior
to the Effective Time, Buyer shall take all action necessary, including but
not
limited to the amendment of the Surviving Corporation’s Bylaws, to
appoint
an
individual who was a director of Seller on the date hereof and who is mutually
acceptable to both Parties to the board of directors of Buyer, to be effective
as soon as practicable following the Effective Time, and cause such individual
to be nominated as a management nominee for election by the shareholders to
the
board of directors of Buyer at the next annual meeting of shareholders of Buyer
following such individual’s election to the board of directors of Buyer. The
officers of Buyer in office immediately prior to the Effective Time, together
with such additional persons as may thereafter be elected, shall serve as the
officers of the Surviving Corporation from and after the Effective Time in
accordance with the Surviving Corporation’s Bylaws, until the earlier of their
resignation or removal or otherwise ceasing to be an officer.
(b) It
is
anticipated that the directors of the Bank, the Seller’s wholly owned
subsidiary, in office immediately prior to the Effective Time, shall serve
as
First Community’s Camden Advisory Board. The amount of the board advisory fees
will be determined in good faith by the Parties.
MANNER
OF CONVERTING SHARES
(a) At
the
Effective Time, in each case subject to Section 3.1(d), by virtue of the Merger
and without any action on the part of the Parties, each share of Seller Common
Stock that is issued and outstanding immediately prior to the Effective Time
(other than shares of Seller Common Stock held by either Party or any Subsidiary
of a Party (in each case other than shares of Seller Common Stock held on behalf
of third parties or held by any Buyer Entity or Seller Entity as a result of
debts previously contracted) or shares of the Common Stock that are owned by
shareholders properly exercising their dissenters’ rights pursuant to Sections
33-13-101 through 33-13-310 of the SCBCA (the “Dissenter
Shares”))
shall
be converted into the right to receive $3.875 in cash and 0.60705 shares of
Buyer Common Stock, less any applicable withholding Taxes (the “Per
Share Purchase Price”).
Assuming no Seller shareholders exercise dissenter’s rights, and assuming the
total number of shares of Seller Common Stock issued and outstanding immediately
prior to the Effective Time is 610,139 shares, then Buyer will issue an
aggregate of 370,384 shares of Buyer Common Stock and $2,364,289 in cash (the
“Merger
Consideration”).
(b) At
the
Effective Time, all shares of Seller Common Stock shall no longer be outstanding
and shall automatically be cancelled and retired and shall cease to exist as
of
the Effective Time, and each certificate previously representing any such shares
of Seller Common Stock (the “Certificates”)
shall
thereafter represent only the right to receive the Per Share Purchase Price
and
any Dissenter Shares shall thereafter represent only the right to receive
applicable payments as set forth in Section 3.8.
(c) If,
prior
to the Effective Time, the outstanding shares of Seller Common Stock or Seller
Options shall have been increased, decreased, changed into or exchanged for
a
different number or kind of shares or securities as a result of a
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split, or other similar change in capitalization, then an
appropriate and proportionate adjustment shall be made to the Per Share Purchase
Price.
(d) Each
share of Seller Common Stock issued and outstanding immediately prior to the
Effective Time and owned by any of the Parties or their respective Subsidiaries
(in each case
other
than shares of Seller Common Stock held on behalf of third parties or as a
result of debts previously contracted) shall, by virtue of the Merger and
without any action on the part of the holder thereof, cease to be outstanding,
shall be cancelled and retired without payment of any consideration therefore,
and shall cease to exist (the “Excluded
Shares”).
(a) As
soon
as reasonably practicable after the Effective Time, Buyer shall cause the
exchange agent selected by Buyer (the “Exchange
Agent”)
to
mail to the former shareholders of Seller appropriate transmittal materials
(which shall specify that delivery shall be effected, and risk of loss and
title
to the certificates or other instruments theretofore representing shares of
Seller Common Stock shall pass, only upon proper delivery of such certificates
or other instruments to the Exchange Agent). The certificate or certificates
of
Seller Common Stock so surrendered shall be duly endorsed as the Exchange Agent
may reasonably require. In the event of a transfer of ownership of shares of
Seller Common Stock represented by certificates that is not registered in the
transfer records of Seller, the Per Share Purchase Price payable for such shares
as provided in Section 3.1 may be issued to a transferee if the certificates
representing such shares are delivered to the Exchange Agent, accompanied by
all
documents required to evidence such transfer and by evidence reasonably
satisfactory to the Exchange Agent that such transfer is proper and that any
applicable stock transfer taxes have been paid. In the event any certificate
representing Seller Common Stock certificate shall have been lost, stolen,
or
destroyed, upon the making of an affidavit of that fact by the person claiming
such certificate to be lost, stolen, or destroyed and the posting by such person
of a bond in such amount as Buyer may reasonably direct as indemnity against
any
claim that may be made against it with respect to such certificate, the Exchange
Agent shall issue in exchange for such lost, stolen, or destroyed certificate
the Per Share Purchase Price as provided for in Section 3.1. The Exchange Agent
may establish such other reasonable and customary rules and procedures in
connection with its duties as it may deem appropriate. Buyer shall pay all
charges and expenses, including those of the Exchange Agent in connection with
the distribution of the Per Share Purchase Price as provided in Section
3.1.
(b) After
the
Effective Time, each holder of shares of Seller Common Stock (other than
Excluded Shares) issued and outstanding at the Effective Time shall surrender
the Certificate or Certificates representing such shares to the Exchange Agent
and shall promptly upon surrender thereof receive in exchange therefor the
consideration provided in Section 3.1, without interest, pursuant to this
Section 3.2. Buyer shall not be obligated to deliver the consideration to which
any former holder of Seller Common Stock is entitled as a result of the Merger
until such holder surrenders such holder’s Certificate or Certificates for
exchange as provided in this Section 3.2. Any other provision of this Agreement
notwithstanding, neither any Buyer Entity, nor any Seller Entity, nor the
Exchange Agent shall be liable to any holder of Seller Common Stock for any
amounts paid or properly delivered in good faith to a public official pursuant
to any applicable abandoned property, escheat, or similar Law.
(c) Each
of
Buyer and the Exchange Agent shall be entitled to deduct and withhold from
the
consideration otherwise payable pursuant to this Agreement to any holder of
shares of Seller Common Stock and Seller Options such amounts, if any, as it
is
required to deduct and withhold with respect to the making of such payment
under
the Code or any provision of state, local, or foreign Tax Law or by any Taxing
Authority or Governmental Authority. To the extent that any amounts are so
withheld by Buyer, the Surviving Corporation, or the Exchange Agent, as the
case
may be, such withheld amounts shall be treated for all purposes of this
Agreement
as having been paid to the holder of the shares of Seller Common Stock, as
applicable in respect of which such deduction and withholding was made by Buyer,
the Surviving Corporation, or the Exchange Agent, as the case may
be.
(d) Adoption
of this Agreement by the shareholders of Seller shall constitute ratification
of
the appointment of the Exchange Agent.
At
and
after the Effective Time, each share of Buyer Common Stock issued and
outstanding immediately prior to the Effective Time shall remain an issued
and
outstanding share of common stock of the Surviving Corporation and shall not
be
affected by the Merger.
(a) At
the
Effective Time, all rights with respect to Seller Common Stock pursuant to
stock
options (the “Seller
Options”)
granted by Seller under The Bank of Camden 2001 Stock Option Plan, which are
outstanding at the Effective Time, whether or not exercisable, shall be
converted into and become rights with respect to Buyer Common Stock, and Buyer
shall assume each Seller Option in accordance with the terms of the Seller
option plan and the stock option agreement by which it is evidenced (the
“Converted
Options”).
From
and after the Effective Time, (i) each Seller Option assumed by Buyer may be
exercised solely for shares of Buyer Common Stock, (ii) the number of shares
of
Buyer Common Stock subject to each Seller Option shall be equal to the product
of the number of shares of Seller Common Stock subject to such Seller Option
immediately prior to the Effective Time multiplied by 0.8094, and (iii) the
per
share exercise price under each such Seller Option shall be adjusted by dividing
the per share exercise price under each such Seller Option by 0.8094 and
rounding down to the nearest cent. Seller agrees to take all necessary steps
to
effectuate the foregoing provisions of this Section 3.4.
(b) Before
the Effective Time, Buyer will take all corporate action necessary to reserve
for future issuance a sufficient additional number of shares of Buyer Common
Stock to provide for the satisfaction of its obligations with respect to the
Converted Options.
(c) Seller’s
board of directors and its compensation committee shall not make any grants
of
Seller Options following the execution of this Agreement.
(d) The
Seller’s board of directors or its compensation committee shall make such
adjustments and amendments to or make such determinations with respect to the
Seller Options to effect the foregoing provisions of this Section
3.4.
(e) Within
10
business days after the Effective Time, Buyer shall file a registration
statement on Form S-8 with respect to the Converted Options that are eligible
for registration on a Form S-8, and Buyer shall use its reasonable best efforts
to maintain the current status of the prospectus or prospectuses contained
therein for so long as such options remain outstanding.
Concurrently
with or as soon as practicable after the execution and delivery of this
Agreement, First Community Bank, National Association (“First
Community”),
a
wholly owned subsidiary of Buyer, and the Bank, a wholly owned subsidiary of
Seller, shall enter into the Plan of Bank Merger, in the form attached hereto
as
Exhibit
A,
pursuant to which the Bank will merge with and into First Community (the
“Bank
Merger”).
The
Plan of Bank Merger shall provide that the directors of First Community as
the
surviving entity of the Bank Merger shall be (a) all the directors of First
Community serving immediately prior to the Bank Merger and (b) one additional
person who shall become a director of First Community who shall be the same
person appointed as a director of the Surviving Company pursuant to Section
2.3.
The parties intend that the Bank Merger will become effective simultaneously
with or immediately following the Effective Time.
At
the
Effective Time, the stock transfer books of Seller shall be closed as to holders
of Seller Common Stock and no transfer of Seller Common Stock by any holder
of
such shares shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 3.2, each Certificate
theretofore representing shares of Seller Common Stock (other than certificates
representing Excluded Shares and Dissenter Shares), shall from and after the
Effective Time represent for all purposes only the right to receive the Per
Share Purchase Price, without interest, as provided in Article 3.
Notwithstanding
any other provision of this Agreement, each holder of shares of Seller Common
Stock exchanged pursuant to the Merger, who would otherwise have been entitled
to receive a fraction of a share of Buyer Common Stock (after taking into
account all certificates delivered by such holder), shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part
of a
share of Buyer Common Stock multiplied by Final
Buyer Stock Price. No
such
holder will be entitled to dividends, voting rights, or any other rights as
a
shareholder in respect of any fractional shares.
Any
holder of shares of Seller Common Stock who perfects such holder’s dissenters’
rights in accordance with and as contemplated by Sections 33-13-101 through
33-13-310 of the SCBCA shall be entitled
to
receive from the Surviving Corporation, in lieu of the Per Share Purchase
Price,
the value of such shares
as to
which dissenters rights have been perfected in
cash
as determined pursuant to such provision of Law; provided,
that
no such
payment shall be made to any dissenting shareholder unless and until such
dissenting shareholder has complied with all applicable provisions of such
Law,
and surrendered to Seller the certificate or certificates representing the
shares for which payment is being made. In the event that after the Effective
Time a dissenting shareholder of Seller fails to perfect, or effectively
withdraws or loses, such holder’s right to appraisal of and payment for such
holder’s Dissenter
Shares,
Buyer
or the Surviving Corporation shall issue and deliver the consideration to
which
such holder of shares of Seller Common Stock is entitled under this Article
3
(without interest) upon
surrender
by such holder of the certificate or certificates representing such
shares
of
Seller
Common Stock held by such holder.
REPRESENTATIONS
AND WARRANTIES OF SELLER
Seller
represents and warrants to Buyer, except as set forth on the Seller Disclosure
Memorandum with respect to each such Section below, as follows:
Seller
is
a corporation duly organized, validly existing, and in good standing under
the
Laws of the State of South Carolina and is a bank holding company within the
meaning of the Bank Holding Company Act of 1956 (the “BHCA”).
The
Bank is a South Carolina state bank, duly organized, validly existing and in
good standing under the laws of the State of South Carolina. Each of Seller
and
the Bank has the corporate power and authority to carry on its business as
now
conducted and to own, lease, and operate its Assets. Each of the Seller and
the
Bank is duly qualified or licensed to transact business as a foreign corporation
in good standing in the states of the United States and foreign jurisdictions
where the character of its Assets or the nature or conduct of its business
requires it to be so qualified or licensed, except for such jurisdictions where
the failure to be so qualified or licensed is not reasonably likely to have,
individually or in the aggregate, a Seller Material Adverse Effect. The minute
book and other organizational documents for each of Seller and the Bank have
been made available to Buyer for its review and, except as disclosed in Section
4.1 of the Seller Disclosure Memorandum, are true and complete in all material
respects as in effect as of the date of this Agreement and accurately reflect
in
all material respects all amendments thereto and all proceedings of the
respective board of directors (including any committees of the board of
directors) and shareholders thereof. The Bank is an “insured institution” as
defined in the Federal Deposit Insurance Act and applicable regulations
thereunder, and the deposits held by Bank are insured by the FDIC’s Bank
Insurance Fund.
(a) Seller
has the corporate power and authority necessary to execute, deliver, and, other
than with respect to the Merger, perform this Agreement, and with respect to
the
Merger, upon the approval of the Merger, including any necessary approvals
referred to in Sections 8.1(b) and 8.1(c) and by Seller’s shareholders in
accordance with this Agreement and the SCBCA,
to
perform its obligations under this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery, and performance of this Agreement
and the consummation of the transactions contemplated herein, including the
Merger, have been duly and validly authorized by all necessary corporate action
in respect thereof on the part of each of Seller, subject to the approval of
this Agreement by the holders of two-thirds of the outstanding shares of Seller
Common Stock, which is the only shareholder vote required for approval of this
Agreement and consummation of the Merger. Subject to any necessary approvals
referred to in Sections 8.1(b) and 8.1(c) and by such requisite shareholder
approval, this Agreement represents a legal, valid, and binding obligation
of
Seller, enforceable against Seller in accordance with its terms (except in
all
cases as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar Laws affecting the
enforcement of creditors’ rights generally and except that the availability of
the equitable
remedy
of
specific performance or injunctive relief is subject to the discretion of the
court before which any proceeding may be brought).
(b) Neither
the execution and delivery of this Agreement by Seller, nor the consummation
by
Seller and the Bank of the transactions contemplated hereby, nor compliance
by
Seller and the Bank with any of the provisions hereof, will (i) conflict
with or result in a breach of any provision of Seller’s Articles of
Incorporation or Bylaws or the certificate or articles of incorporation or
association or bylaws of any Seller Subsidiary or any resolution adopted by
the
board of directors or the shareholders of any Seller Entity, or (ii) except
as disclosed in Section 4.2 of the Seller Disclosure Memorandum, constitute
or
result in a Default under, or require any Consent pursuant to, or result in
the
creation of any Lien on any Asset of any Seller Entity under, any Contract
or
Permit of any Seller Entity or, (iii) subject to receipt of the requisite
Consents referred to in Section 8.1(c), constitute or result in a Default under,
or require any Consent pursuant to, any Law or Order applicable to any Seller
Entity or any of their respective material Assets (including any Buyer Entity
or
any Seller Entity becoming subject to or liable for the payment of any Tax
on
any of the Assets owned by any Buyer Entity or any Seller Entity being
reassessed or revalued by any Regulatory Authority).
(c) Other
than in connection or compliance with the provisions of the Securities Laws
and
applicable state corporate and securities Laws, and other than Consents required
from Regulatory Authorities, and other than notices to or filings with the
Internal Revenue Service or the Pension Benefit Guaranty Corporation with
respect to any employee benefit plans, no notice to, filing with, or Consent
of,
any Governmental Authority is necessary for the consummation by Seller of the
Merger and the other transactions contemplated in this Agreement.
(a) The
authorized capital stock of Seller consists only of 20,000,000 shares of Seller
Common Stock, of which 610,139 shares are issued and outstanding as of the
date
of this Agreement, and, assuming that all of the issued and outstanding Seller
Options had been exercised, not more than an additional 88,000 shares, with
a
per share weighted average exercise price of $10.78, would be issued and
outstanding at the Effective Time. All of the issued and outstanding shares
of
capital stock of Seller are duly and validly issued and outstanding and are
fully paid and nonassessable. None of the outstanding shares of capital stock
of
Seller has been issued in violation of any preemptive rights of the current
or
past shareholders of Seller.
(b) Except
for the 88,000 shares of Seller Common Stock reserved for issuance pursuant
to
outstanding Seller Options, each as disclosed in Section 4.3 of the Seller
Disclosure Memorandum, there are no shares of capital stock or other equity
securities of Seller reserved for issuance and no outstanding Rights relating
to
the capital stock of Seller.
(c) Except
as
specifically set forth in this Section 4.3, there are no shares of Seller
capital stock or other equity securities of Seller outstanding and there are
no
outstanding Rights with respect to any Seller securities or any right or
privilege (whether pre-emptive or contractual) capable of becoming a Contract
or
Right for the purchase, subscription, exchange or issuance of any securities
of
Seller.
Seller
has no Subsidiaries except the Bank and Seller owns all of the equity interests
in the Bank. No capital stock (or other equity interest) of the Bank is or
may
become required to be
issued
(other than to another Seller Entity) by reason of any Rights, and there are
no
Contracts by which the Bank is bound to issue (other than to another Seller
Entity) additional shares of its capital stock (or other equity interests)
or
Rights or by which any Seller Entity is or may be bound to transfer any shares
of the capital stock (or other equity interests) of the Bank (other than to
another Seller Entity). There are no Contracts relating to the rights of any
Seller Entity to vote or to dispose of any shares of the capital stock (or
other
equity interests) of the Bank. All of the shares of capital stock (or other
equity interests) of the Bank are fully paid and nonassessable and are owned
directly or indirectly by Seller free and clear of any Lien. The Bank is a
South
Carolina state bank duly organized, validly existing, and in good standing
under
the Laws of South Carolina, and has the corporate or entity power and authority
necessary for it to own, lease, and operate its Assets and to carry on its
business as now conducted. The Bank is duly qualified or licensed to transact
business as a foreign entity in good standing in the States of the United States
and foreign jurisdictions where the character of its Assets or the nature or
conduct of its business requires it to be so qualified or licensed, except
for
such jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Seller Material
Adverse Effect. The minute books and other organizational documents for the
Bank
have been made available to Buyer for its review, and, except as disclosed
in
Section 4.4 of the Seller Disclosure Memorandum, are true and complete in all
material respects as in effect as of the date of this Agreement and accurately
reflect in all material respects all amendments thereto and all proceedings
of
the board of directors and shareholders thereof.
(a) Except
as
disclosed in Section 4.5 of the Seller Disclosure Memorandum, Seller has timely
filed and made available to Buyer all Exchange Act Documents required to be
filed by Seller since its inception (the
“Seller
Exchange Act Reports”).
The
Seller Exchange Act Reports (i) at the time filed, complied in all material
respects with the applicable requirements of the Securities Laws and other
applicable Laws and (ii) did not, at the time they were filed (or, if
amended or superseded by a filing prior to the date of this Agreement, then
on
the date of such filing or, in the case of registration statements, at the
effective date thereof) contain any untrue statement of a material fact or
omit
to state a material fact required to be stated in such Seller Exchange Act
Reports or necessary in order to make the statements in such Seller Exchange
Act
Reports not misleading. Each offering or sale of securities by Seller (i) was
either registered under the Securities Act or made pursuant to a valid exemption
from registration, (ii) complied in all material respects with the
applicable requirements of the Securities Laws and other applicable Laws, except
for immaterial late “blue sky” filings, including disclosure and broker/dealer
registration requirements, and (iii) was made pursuant to offering
documents which did not, at the time of the offering (or, in the case of
registration statements, at the effective date thereof) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in the offering documents or necessary in order to make the statements
in
such documents not misleading. Seller has delivered or made available to Buyer
all comment letters received by Seller from the staff of the SEC and all
responses to such comment letters by or on behalf of Seller with respect to
all
filings under the Securities Laws. Seller’s principal executive officer and
principal financial officer (and Seller’s former principal executive officers
and principal financial officers, as applicable) have made the certifications
required by Sections 302 and 906 of the Sarbanes-Oxley Act and the rules and
regulations of the Exchange Act thereunder with respect to Seller’s Exchange Act
Documents to the extent such rules or regulations applied at the time of the
filing. For purposes of
the
preceding sentence, “principal executive officer” and “principal financial
officer” shall have the meanings given to such terms in the Sarbanes-Oxley Act.
Such certifications contain no qualifications or exceptions to the matters
certified therein and have not been modified or withdrawn; and neither Seller
nor any of its officers has received notice from any Regulatory Authority
questioning or challenging the accuracy, completeness, content, form, or manner
of filing or submission of such certifications. The
Bank
is not required to file any Exchange Act Documents.
(b) Each
of
the Seller Financial Statements (including, in each case, any related notes)
that are contained in the Seller Exchange Act Reports, including any Seller
Exchange Act Reports filed after the date of this Agreement until the Effective
Time, complied, or will comply, as to form in all material respects with the
Exchange Act, was, or will be, prepared in accordance with GAAP applied on
a
consistent basis throughout the periods involved (except as may be indicated
in
the notes to such financial statements or, in the case of unaudited interim
statements, as permitted by Form 10-QSB of the Exchange Act), fairly presented
the consolidated financial position of Seller and the Bank as at the respective
dates and the consolidated results of operations and cash flows for the periods
indicated, including the fair values of the assets and liabilities shown
therein, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are
not
expected to be material in amount or effect, and were certified to the extent
required by the Sarbanes-Oxley Act.
(c) Seller’s
independent public accountants, which have expressed their opinion with respect
to the Financial Statements of Seller and its Subsidiaries whether or not
included in Seller’s Exchange Act Reports (including the related notes), are and
have been throughout the periods covered by such Financial Statements (x) a
registered public accounting firm (as defined in Section 2(a)(12) of the
Sarbanes-Oxley Act) (to the extent applicable during such period), (y)
“independent” with respect to Seller within the meaning of Regulation S-X, and
(z) with respect to Seller, in compliance with subsections (g) through (l)
of
Section 10A of the Exchange Act and related Securities Laws. Section 4.5(d)
of
the Seller Disclosure Memorandum lists all non-audit services preformed by
Seller’s independent public accountants for Seller and its
Subsidiaries.
(d) Seller
maintains disclosure controls and procedures that would be required by Rule
13a-15 or 15d-15 under the Exchange Act; such controls and procedures are
effective to ensure that all material information concerning Seller and its
Subsidiaries is made known on a timely basis to the principal executive officer
and the principal financial officer. Seller
and, to the knowledge of Seller, its directors and executive officers have
complied at all times with Section 16(a) of the Exchange Act, in all material
respects, including the filing requirements thereunder to the extent
applicable.
No
Seller
Entity has any Liabilities required under GAAP to be set forth on a consolidated
balance sheet or in the notes thereto that are reasonably likely to have,
individually or in the aggregate, a Seller Material Adverse Effect, except
Liabilities which are (i) accrued or reserved against in the consolidated
balance sheet of Seller as of September 30, 2005, included in the Seller
Financial Statements delivered prior to the date of this Agreement or reflected
in the notes thereto, (ii) incurred in the ordinary course of business
consistent with past practices, or (iii) incurred in connection with the
transactions contemplated by this Agreement. Section 4.6 of the Seller
Disclosure Memorandum lists, and Seller has attached and delivered to
Buyer
copies
of the documentation creating or governing, all securitization transactions
and
“off-balance
sheet arrangements”
(as
defined in Item 303(c)(2) of Regulation S-B of the Exchange Act) effected by
Seller or its Subsidiaries other than letters of credit and unfunded loan
commitments or credit lines. Except as disclosed in Section 4.6 of the Seller
Disclosure Memorandum or as reflected on Seller’s balance sheet at September 30,
2005, no Seller Entity is directly or indirectly liable, by guarantee,
indemnity, or otherwise, upon or with respect to, or obligated, by discount
or
repurchase agreement or in any other way, to provide funds in respect to, or
obligated to guarantee or assume any Liability of any Person for any amount
in
excess of $50,000 and any amounts, whether or not in excess of $50,000 that,
in
the aggregate, exceed $100,000. Except (x) as reflected in Seller’s balance
sheet at September 30, 2005 or liabilities described in any notes thereto (or
liabilities for which neither accrual nor footnote disclosure is required
pursuant to GAAP or any applicable Regulatory Authority) or (y) for liabilities
incurred in the ordinary course of business since September 30, 2005 consistent
with past practice or in connection with this Agreement or the transactions
contemplated hereby, neither Seller nor any of its Subsidiaries has any Material
Liabilities or obligations of any nature.
Except
as
disclosed in the Seller Financial Statements delivered prior to the date of
this
Agreement or as disclosed in Section 4.7 of the Seller Disclosure Memorandum,
(i) there have been no events, changes, or occurrences which have had, or
are reasonably likely to have, individually or in the aggregate, a Seller
Material Adverse Effect, (ii) none of the Seller Entities has taken any
action, or failed to take any action, prior to the date of this Agreement,
which
action or failure, if taken after the date of this Agreement, would represent
or
result in a material breach or violation of any of the covenants and agreements
of Seller provided in this Agreement, and (iii) since December 31, 2004 the
Seller Entities have conducted their respective businesses in the ordinary
course of business consistent with past practice.
(a) All
Seller Entities have timely filed with the appropriate Taxing Authorities,
all
Tax Returns in all jurisdictions in which Tax Returns are required to be filed,
and such Tax Returns are correct and complete in all material respects. None
of
the Seller Entities is the beneficiary of any extension of time within which
to
file any Tax Return. All Taxes of the Seller Entities (whether or not shown
on
any Tax Return) have been fully and timely paid. There are no Liens for any
Taxes (other than a Lien for current real property or ad
valorem Taxes
not
yet due and payable) on any of the Assets of any of the Seller Entities. No
claim has ever been made by an authority in a jurisdiction where any Seller
Entity does not file a Tax Return that such Seller Entity may be subject to
Taxes by that jurisdiction.
(b) None
of
the Seller Entities has received any notice of assessment or proposed assessment
in connection with any Taxes, and there are no threatened or pending disputes,
claims, audits, or examinations regarding any Taxes of any Seller Entity or
the
assets of any Seller Entity. No officer or employee responsible for Tax matters
of any Seller Entity expects any Taxing Authority to assess any additional
Taxes
for any period for which Tax Returns have been filed. No issue has been raised
by a Taxing Authority in any prior examination of the Seller which, by
application of the same or similar principles, could be expected to result
in a
proposed deficiency for any subsequent taxable period. None of the Seller
Entities has waived any statute of limitations in respect of any Taxes or agreed
to a Tax assessment or deficiency.
(c) Each
Seller Entity has complied in all material respects with all applicable Laws
relating to the withholding of Taxes and the payment thereof to appropriate
authorities, including Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee or independent contractor,
and Taxes required to be withheld and paid pursuant to Sections 1441 and 1442
of
the Code or similar provisions under foreign Law.
(d) The
unpaid Taxes of each Seller Entity (i) did not, as of the most recent fiscal
month end, exceed the reserve for Tax Liability (rather than any reserve for
deferred Taxes established to reflect timing differences between book and Tax
income) set forth on the face of the most recent balance sheet (rather than
in
any notes thereto) for such Seller Entity and (ii) do not exceed that reserve
as
adjusted for the passage of time through the Closing Date in accordance with
past custom and practice of the Seller Entities in filing their Tax
Returns.
(e) Except
as
described in Section 4.8(e) of the Seller Disclosure Memorandum, none of the
Seller Entities is a party to any Tax allocation or sharing agreement and none
of the Seller Entities has been a member of an affiliated group filing a
consolidated federal income Tax Return or has any Tax Liability of any Person
under Treasury Regulation Section 1.1502-6 or any similar provision of state,
local or foreign Law, or as a transferee or successor, by contract or
otherwise.
(f) During
the five-year period ending on the date hereof, none of the Seller Entities
was
a “distributing corporation” or a “controlled corporation” as defined in, and in
a transaction intended to be governed by Section 355 of the Code.
(g) Except
as
disclosed in Section 4.8(g) of the Seller Disclosure Memorandum, none of the
Seller Entities has made any payments, is obligated to make any payments, or
is
a party to any contract that could obligate it to make any payments that could
be disallowed as a deduction under Section 280G or 162(m) of the Code, or which
would be subject to withholding under Section 4999 of the Code. None of the
Seller Entities has been or will be required to include any adjustment in
taxable income for any Tax period (or portion thereof) pursuant to Section
481
of the Code or any comparable provision under state or foreign Tax Laws as
a
result of transactions or events occurring prior to the Closing. There is no
taxable income of Seller that will be required under applicable tax law to
be
reported by Buyer, for a taxable period beginning after the Closing Date which
taxable income was realized prior to the Closing Date. Any net operating losses
of the Seller Entities disclosed in Section 4.8(g) of the Seller Disclosure
Memorandum are not subject to any limitation on their use under the provisions
of Sections 382 or 269 of the Code or any other provisions of the Code or the
Treasury Regulations dealing with the utilization of net operating losses other
than any such limitations as may arise as a result of the consummation of the
transactions contemplated by this Agreement.
(h) Each
of
the Seller Entities is in compliance in all material respects with, and its
records contain all information and documents (including properly completed
IRS
Forms W-9) necessary to comply with, all applicable information reporting and
Tax withholding requirements
under federal, state, and local Tax Laws, and such records identify with
specificity all accounts subject to backup withholding under Section 3406 of
the
Code.
(i) No
Seller
Entity is subject to any private letter ruling of the IRS or comparable rulings
of any Taxing Authority.
(j) No
property owned by any Seller Entity is (i) property required to be treated
as
being owned by another Person pursuant to the provisions of Section 168(f)(8)
of
the Internal Revenue Code of 1954, as amended and in effect immediately prior
to
the enactment of the Tax
Reform
Act of 1986, (ii) “tax-exempt use property” within the meaning of Section
168(h)(1) of the Code, (iii) “tax-exempt bond financed property” within the
meaning of Section 168(g) of the Code, (iv) “limited use property” within the
meaning of Rev. Proc. 76-30, (v) subject to Section 168(g)(1)(A) of the Code,
or
(vi) subject to any provision of state, local or foreign Law comparable to
any
of the provisions listed above.
(k) No
Seller
Entity has any “corporate acquisition indebtedness” within the meaning of
Section 279 of the Code.
(l) Seller
has disclosed on its federal income Tax Returns all positions taken therein
that
are reasonably believed to give rise to substantial understatement of federal
income tax within the meaning of Section 6662 of the Code.
(m)
No
Seller Entity has participated in any reportable transaction, as defined in
Treasury Regulation Section 1.6011-4(b)(1), or a transaction substantially
similar to a reportable transaction.
(n) Seller
has made available to Buyer complete copies of (i) all federal, state, local
and
foreign income or franchise Tax Returns of the Seller Entities relating to
the
taxable periods since inception and (ii) any audit report issued within the
last
four years relating to any Taxes due from or with respect to the Seller
Entities.
(o) No
Seller
Entity nor any other Person on its behalf has (i) filed a consent pursuant
to
Section 341(f) of the Code (as in effect prior to the repeal under the Jobs
and
Growth Tax Reconciliation Act of 2003) or agreed to have Section 341(f)(2)
of
the Code (as in effect prior to the repeal under the Jobs and Growth Tax
Reconciliation Act of 2003) apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by any Seller
Entities, (ii) executed or entered into a closing agreement pursuant to Section
7121 of the Code or any similar provision of Law with respect to the Seller
Entities, or (iii) granted to any Person any power of attorney that is currently
in force with respect to any Tax matter. No Seller Entity has, or ever had,
a
permanent establishment in any country other than the United States, or has
engaged in a trade or business in any country other than the United States
that
subjected it to tax in such country.
For
purposes of this Section 4.8, any reference to the Seller or any Seller Entity
shall be deemed to include any Person which merged with or was liquidated into
or otherwise combined with the Seller or a Seller Entity.
(a) The
Seller’s allowance for possible loan, lease, securities, or credit losses (the
“Allowance”)
shown
on the balance sheets of Seller included in the most recent Seller Financial
Statements dated prior to the date of this Agreement was, and the Allowance
shown on the balance sheets of Seller included in the Seller Financial
Statements as of dates subsequent to the execution of this Agreement will be,
as
of the dates thereof, adequate (within the meaning of GAAP and applicable
regulatory requirements or guidelines) to provide for all known or reasonably
anticipated losses relating to or inherent in the loan, lease and securities
portfolios (including accrued interest receivables, letters of credit, and
commitments to make loans or extend credit), by the Seller Entities as of the
dates thereof. The Seller Financial Statements fairly present the values of
all
loans, leases, securities, tangible and intangible assets and liabilities,
and
any impairments thereof on the bases set forth therein.
(b) As
of the
date hereof, all loans, discounts and leases (in which any Seller Entity is
lessor) reflected on Seller’s Financial Statements were, and with respect to the
consolidated balance sheets delivered as of the dates subsequent to the
execution of this Agreement will be as of the dates thereof, (a) at the time
and
under the circumstances in which made, made for good, valuable and adequate
consideration in the ordinary course of business and are the legal and binding
obligations of the obligors thereof, (b) evidenced by genuine notes, agreements,
or other evidences of indebtedness and (c) to the extent secured, have been
secured, to the Knowledge of Seller, by valid liens and security interests
which
have been perfected. Accurate lists of all loans, discounts and financing leases
as of November 30, 2005 and on a monthly basis thereafter, and of the investment
portfolios of each Seller Entity as of such date, have been and will be made
available to Buyer concurrently with the Seller Disclosure Memorandum. Except
as
specifically set forth in Section 4.9(b) of the Seller Disclosure Memorandum,
neither Seller nor the Bank is a party to any written or oral loan agreement,
note, or borrowing arrangement, including any loan guaranty, that was, as of
the
most recent month-end (i) delinquent by more than 30 days in the payment of
principal or interest, (ii) to Seller’s Knowledge, otherwise in material default
for more than 30 days, (iii) classified as “substandard,” “doubtful,” “loss,”
“other assets especially mentioned” or any comparable classification by Seller
or by any applicable Regulatory Authority or Reserve, (iv) an obligation of
any
director, executive officer or 10% shareholder of any Seller Entity who is
subject to Regulation O of the Federal Reserve Board (12 C.F.R. Part 215),
or
any person, corporation or enterprise controlling, controlled by or under common
control with any of the foregoing, or (v) in violation of any Law.
(a) To
Seller’s Knowledge, except as disclosed in Section 4.10 of the Seller Disclosure
Memorandum or as disclosed or reserved against in the Seller Financial
Statements delivered prior to the date of this Agreement, the Seller Entities
have good and marketable title, free and clear of all Liens, to all of their
respective Assets that they own. In addition, to Seller’s Knowledge, all
tangible properties used in the businesses of the Seller Entities are in good
condition, reasonable wear and tear excepted, and are usable in the ordinary
course of business consistent with Seller’s past practices.
(b) All
Assets which are material to Seller’s business, held under leases or subleases
by any of the Seller Entities, are held under valid Contracts enforceable in
accordance with their respective terms, and each such Contract is in full force
and effect.
(c) The
Seller Entities currently maintain insurance, including bankers’ blanket bonds,
with insurers of recognized financial responsibility, similar in amounts, scope,
and coverage to that maintained by other peer organizations. None of the Seller
Entities has received notice from any insurance carrier that (i) any policy
of insurance will be canceled or that coverage thereunder will be reduced or
eliminated, (ii) premium costs with respect to such policies of insurance
will be substantially increased, or (iii) similar coverage will be denied or
limited or not extended or renewed with respect to any Seller Entity, any act
or
occurrence, or that any Asset, officer, director, employee or agent of any
Seller Entity will not be covered by such insurance or bond. There are presently
no claims for amounts exceeding $25,000 individually or in the aggregate pending
under such policies of insurance or bonds, and no notices of claims in excess
of
such amounts have been given by any Seller Entity under such policies. Seller
has made no claims, and no claims are contemplated to be made, under its
directors’ and officers’ errors and omissions or other insurance or bankers’
blanket bond.
(d) The
Assets of the Seller Entities include all Assets required by Seller Entities
to
operate the business of the Seller Entities as presently conducted.
Except
as
disclosed in Section 4.11 of the Seller Disclosure Memorandum, each Seller
Entity owns or has a license to use all of the Intellectual Property used by
such Seller Entity in the course of its business, including sufficient rights
in
each copy possessed by each Seller Entity. Each Seller Entity is the owner
of or
has a license, with the right to sublicense, to any Intellectual Property sold
or licensed to a third party by such Seller Entity in connection with such
Seller Entity’s business operations, and such Seller Entity has the right to
convey by sale or license any Intellectual Property so conveyed. To Seller’s
Knowledge, no Seller Entity is in Default under any of its Intellectual Property
licenses. To Seller’s Knowledge, no proceedings have been instituted, or are
pending or to the Knowledge of Seller threatened, which challenge the rights
of
any Seller Entity with respect to Intellectual Property used, sold, or licensed
by such Seller Entity in the course of its business, nor has any person claimed
or alleged any rights to such Intellectual Property. To Seller’s Knowledge, the
conduct of the business of the Seller Entities does not infringe any
Intellectual Property of any other person. Except as disclosed in Section 4.11
of the Seller Disclosure Memorandum, no Seller Entity is obligated to pay any
recurring royalties to any Person with respect to any such Intellectual
Property. Seller does not have any Contracts with its directors, officers,
or
employees which require such officer, director, or employee to assign any
interest in any Intellectual Property to a Seller Entity and to keep
confidential any trade secrets, proprietary data, customer information, or
other
business information of a Seller Entity, and to Seller’s Knowledge, no such
officer, director, or employee is party to any Contract with any Person other
than a Seller Entity which requires such officer, director or employee to assign
any interest in any Intellectual Property to any Person other than a Seller
Entity or to keep confidential any trade secrets, proprietary data, customer
information, or other business information of any Person other than a Seller
Entity. To Seller’s Knowledge, no officer, director, or employee of any Seller
Entity is party to any confidentiality, nonsolicitation, noncompetition, or
other Contract which restricts or prohibits such officer, director, or employee
from engaging in activities competitive with any Person, including any Seller
Entity.
(a) Seller
has delivered, or caused to be delivered or made available to Buyer, true and
complete copies of, all environmental site assessments, test results, analytical
data, boring logs, permits for storm water, wetlands fill, or other
environmental permits for construction of any building, parking lot or other
improvement, and other environmental reports and studies in the possession
of
any Seller Entity relating to its Participating Facilities and Operating
Properties. To
Seller’s Knowledge, there are no material violations of Environmental Laws on
properties that secure loans made by Seller or Bank.
(b) To
Seller’s Knowledge, each Seller Entity, its Participation Facilities, and its
Operating Properties are, and have been, in compliance with all Environmental
Laws, except for violations which are not reasonably likely to have,
individually or in the aggregate, a Seller Material Adverse Effect.
(c) There
is
no Litigation pending, or to Seller’s Knowledge, no environmental enforcement
action, investigation, or litigation threatened before any Governmental
Authority or other forum in which any Seller Entity or any of its Operating
Properties or Participation
Facilities
(or Seller in respect of such Operating Property or Participation Facility)
has
been or, with respect to threatened Litigation, may be named as a defendant
(i) for alleged noncompliance (including by any predecessor) with or
Liability under any Environmental Law or (ii) relating to the release,
discharge, spillage, or disposal into the environment of any Hazardous Material,
whether or not occurring at, on, under, adjacent to, or affecting (or
potentially affecting) a site currently or formerly owned, leased, or operated
by any Seller Entity or any of its Operating Properties or Participation
Facilities.
(d) During
the period of (i) any Seller Entity’s ownership or operation of any of
their respective current properties, (ii) any Seller Entity’s participation
in the management of any Participation Facility, or (iii) any Seller
Entity’s holding of a security interest in any Operating Property, there have
been no releases, discharges, spillages, or disposals of Hazardous Material
in,
on, under, adjacent to, or affecting (or potentially affecting) such properties.
Prior to the period of (i) any Seller Entity’s ownership or operation of
any of their respective current properties, (ii) any Seller Entity’s
participation in the management of any Participation Facility, or (iii) any
Seller Entity’s holding of a security interest in any Operating Property, to
Seller’s Knowledge, there were no releases, discharges, spillages, or disposals
of Hazardous Material in, on, under, or affecting any such property,
Participation Facility or Operating Property. During and prior to the period
of
(i) Seller Entity’s ownership or operation of any of their respective current
properties, (ii) any Seller Entity’s participation in the management of any
Participation Facility, or (iii) any Seller Entity’s holding of a security
interest in any Operating Property, there have been no violations of any
Environmental Laws, including but not limited to unauthorized alterations of
wetlands.
(a) Seller
is
a bank holding company duly registered and in good standing as such with the
Federal Reserve. Seller Bank is a state chartered bank in good standing with
the
South Carolina State Board of Financial Institutions and is a member in good
standing of the FDIC.
(b) Compliance
with Permits, Laws and Orders.
(i) Each
of
the Seller Entities has in effect all Permits and has made all filings,
applications, and registrations with Governmental Authorities that are required
for it to own, lease, or operate its assets and to carry on its business as
now
conducted, and there has occurred no Default under any such Permit applicable
to
their respective businesses or employees conducting their respective
businesses.
(ii) None
of
the Seller Entities is in Default under any Laws or Orders applicable to its
business or employees conducting its business.
(iii) None
of
the Seller Entities has received any notification or communication from any
Governmental Authority (A) asserting that Seller or any of its Subsidiaries
is in Default under any of the Permits, Laws, or Orders which such Governmental
Authority enforces, (B) threatening to revoke any Permits, or
(C) requiring Seller or any of its Subsidiaries (x) to enter into or
consent to the issuance of a cease and desist order, formal agreement,
directive, commitment, or memorandum of understanding, or (y) to adopt any
resolution of its board of directors or similar undertaking.
(iv) There
(A) is no unresolved violation, criticism, or exception by any Governmental
Authority with
respect
to any report or statement relating to any examinations or inspections of Seller
or any of its Subsidiaries, (B) are no notices or correspondence received by
Seller with respect to formal or informal inquiries by, or disagreements or
disputes with, any Governmental Authority with respect to Seller’s or any of
Seller’s Subsidiaries’ business, operations, policies, or procedures since its
inception, and (C) is not any pending or, to Seller’s Knowledge, threatened, nor
has any Governmental Authority indicated an intention to conduct any,
investigation, or review of it or any of its Subsidiaries.
(v) None
of
the Seller Entities nor any of its directors, officers, employees, or
Representatives acting on its behalf has offered, paid, or agreed to pay any
Person, including any Government Authority, directly or indirectly, any thing
of
value for the purpose of, or with the intent of obtaining or retaining any
business in violation of applicable Laws, including (1) using any corporate
funds for any unlawful contribution, gift, entertainment, or other unlawful
expense relating to political activity, (2) making any direct or indirect
unlawful payment to any foreign or domestic government official or employee
from
corporate funds, (3) violating any provision of the Foreign Corrupt
Practices Act of 1977, as amended, or (4) making any bribe, rebate, payoff,
influence payment, kickback, or other unlawful payment.
(vi) Each
Seller Entity has complied in all material respects with all requirements of
Law
under the Bank Secrecy Act and the USA Patriot Act, and each Seller Entity
has
timely filed all reports of suspicious activity, including those required under
12 C.F.R. § 353.3.
(a) No
Seller
Entity is the subject of any Litigation asserting that it or any other Seller
Entity has committed an unfair labor practice (within the meaning of the
National Labor Relations Act or comparable state Law) or other violation of
state or federal labor Law or seeking to compel it or any other Seller Entity
to
bargain with any labor organization or other employee representative as to
wages
or conditions of employment, nor is any Seller Entity party to any collective
bargaining agreement or subject to any bargaining order, injunction, or other
Order relating to Seller’s relationship or dealings with its employees, any
labor organization or any other employee representative. There is no strike,
slowdown, lockout, or other job action or labor dispute involving any Seller
Entity pending or threatened and there have been no such actions or disputes
in
the past five years. To Seller’s Knowledge, there has not been any attempt by
any Seller Entity employees or any labor organization or other employee
representative to organize or certify a collective bargaining unit or to engage
in any other union organization activity with respect to the workforce of any
Seller Entity. Except as disclosed in Section 4.14 of the Seller Disclosure
Memorandum, employment of each employee and the engagement of each independent
contractor of each Seller Entity is terminable at will by the relevant Seller
Entity without (i) any penalty, liability, or severance obligation incurred
by
any Seller Entity, (ii) and in all cases without prior consent by any
Governmental Authority. No Seller Entity will owe any amounts to any of its
employees or independent contractors as of the Closing
Date, including any amounts incurred for any wages, bonuses, vacation pay,
sick
leave, contract notice periods, change of control payments, or severance
obligations except as disclosed in Section 4.14 of the Seller Disclosure
Memorandum.
(b) To
Seller’s Knowledge, all of the employees employed in the United States are
either United States citizens or are legally entitled to work in the United
States under the Immigration Reform and Control Act of 1986, as amended,
other
United States immigration Laws and the Laws related to the employment of
non-United States citizens applicable in the state in which the employees
are
employed.
(c) No
Seller
Entity has effectuated (i) a “plant closing” (as defined in the Worker
Adjustment and Retraining Notification Act (the “WARN
Act”))
affecting any site of employment or one or more facilities or operating units
within any site of employment or facility of any Seller Entity; or (ii) a
“mass layoff” (as defined in the WARN Act) affecting any site of employment or
facility of any Seller Entity; and no Seller Entity has been affected by any
transaction or engaged in layoffs or employment terminations sufficient in
number to trigger application of any similar state or local Law. None of any
Seller Entity’s employees has suffered an “employment loss” (as defined in the
WARN Act) since six months prior to the Closing Date.
(d) Section
4.14 of the Seller Disclosure Memorandum contains a list of all independent
contractors of each Seller Entity (separately listed by Seller Entity) and
each
such Person meets the standard for an independent contractor under all Laws
(including Treasury Regulations under the Code and federal and state labor
and
employment Laws) and no such Person is an employee of any Seller Entity under
any applicable Law.
(a) Seller
has disclosed in Section 4.15 of the Seller Disclosure Memorandum, and has
delivered or made available to Buyer prior to the execution of this Agreement,
(i) copies of each Employee Benefit Plan currently adopted, maintained by,
sponsored in whole or in part by, or contributed or required to be contributed
to by any Seller Entity or ERISA Affiliate thereof for the benefit of employees,
former employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries or under which employees, retirees, former
employees, dependents, spouses, directors, independent contractors, or other
beneficiaries are eligible to participate (each, a “Seller
Benefit Plan,”
and
collectively, the “Seller
Benefit Plans”)
and
(ii) a list of each Employee Benefit Plan that is not identified in (i) above
(e.g., former Employee Benefit Plans) but for which any Seller Entity or ERISA
Affiliate has or reasonably could have any obligation or Liability. Any of
the
Seller Benefit Plans which is an “employee pension benefit plan,” as that term
is defined in ERISA Section 3(2), is referred to herein as a “Seller
ERISA Plan.”
Each
Seller ERISA Plan which is also a “defined benefit plan” (as defined in Code
Section 414(j)) is referred to herein as a “Seller
Pension Plan,”
and
is
identified as such in Section 4.15 of the Seller Disclosure
Memorandum.
(b) Seller
has delivered or made available to Buyer prior to the execution of this
Agreement (i) all trust agreements or other funding arrangements for all
Employee Benefit Plans, (ii) all determination letters, rulings, opinion
letters, information letters, or advisory opinions issued by the United States
Internal Revenue Service (“IRS”
),
the
United States Department of Labor (“DOL”)
or the
Pension Benefit Guaranty Corporation during this calendar year or any of the
preceding three calendar years, (iii) any filing or documentation (whether
or
not filed with the IRS) where corrective action was taken in connection with
the
IRS
EPCRS program set forth in Revenue Procedure 2001-17 (or its predecessor or
successor rulings), (iv) annual reports or returns, audited or unaudited
financial statements, actuarial reports, and valuations prepared for any
Employee Benefit Plan for the current plan year and the three preceding plan
years, and (v) the most recent summary plan descriptions and any material
modifications thereto.
(c) Each
Seller Benefit Plan is in material compliance with the terms of such Seller
Benefit Plan, in material compliance with the applicable requirements of
the
Code, in material compliance with the applicable requirements of ERISA, and
in
material compliance with any other applicable Laws. Each Seller ERISA Plan
which
is intended to be qualified under Section
401(a)
of
the Code has received a favorable determination letter or opinion from the
IRS
that is still in effect and applies to the Seller ERISA Plan as amended and
as
administered or, within the time permitted under Code Section 401(b), has timely
applied for a favorable determination letter which when issued will apply
retroactively to the Seller ERISA Plan as amended and as administered. Seller
is
not aware of any circumstances likely to result in revocation of any such
favorable determination letter. Seller has not received any communication
(written or unwritten) from any Governmental Authority questioning or
challenging the compliance of any Seller Benefit Plan with applicable Laws.
No
Seller Benefit Plan is currently being audited by any Governmental Authority
for
compliance with applicable Laws or has been audited with a determination by
any
Governmental Authority that the Employee Benefit Plan failed to comply with
applicable Laws.
(d) There
has
been no material oral or written representation or communication with respect
to
any aspect of the Employee Benefit Plans made to employees of the Seller which
is not in accordance with the written or otherwise preexisting terms and
provisions of such plans. To Seller’s Knowledge, neither Seller nor any
administrator or fiduciary of any Seller Benefit Plan (or any agent of any
of
the foregoing) has engaged in any transaction, or acted or failed to act in
any
manner, which could subject Seller or Buyer to any direct or indirect Liability
(by indemnity or otherwise) for breach of any fiduciary, co-fiduciary, or other
duty under ERISA. To Seller’s Knowledge, there are no unresolved claims or
disputes under the terms of, or in connection with, the Seller Benefit Plans
other than claims for benefits which are payable in the ordinary course of
business and no action, proceeding, prosecution, inquiry, hearing, or
investigation has been commenced with respect to any Seller Benefit
Plan.
(e) All
Seller Benefit Plan documents and annual reports or returns, audited or
unaudited financial statements, actuarial valuations, summary annual reports,
and summary plan descriptions issued with respect to the Seller Benefit Plans
are correct and complete in all material respects, have been timely filed with
the IRS or the DOL, and distributed to participants of the Seller Benefit Plans
(as required by Law), and there have been no changes in the information set
forth therein.
(f) To
the
Seller’s Knowledge, no “party
in interest”
(as
defined in ERISA Section 3(14)) or “disqualified
person”
(as
defined in Code Section 4975(e)(2)) of any Seller Benefit Plan has engaged
in
any nonexempt “prohibited
transaction”
(described in Code Section 4975(c) or ERISA Section 406).
(g) No
Seller
Entity has, or ever has had, a Seller Pension Plan, or any plan that is or
was
subject to Code Section 412 or ERISA Section 302 or Title IV of ERISA. There
is
no Lien nor is there expected to be a Lien under Code Section 412(n) or ERISA
Section 302(f) or Tax under Code Section 4971 applicable to any Seller Entity
or
any Seller Entity’s Assets. Neither Seller nor any of its ERISA Affiliates is
subject to or can reasonably be expected to become
subject to a Lien under Code Section 401(a)(29). All premiums required to be
paid under ERISA Section 4006, if any, have been timely paid by Seller and
by
its ERISA Affiliates.
(h) No
Liability under Title IV of ERISA has been or is expected to be incurred
by
Seller or its ERISA Affiliates and no event has occurred that could reasonably
result in Liability under Title IV of ERISA being incurred by Seller or its
ERISA Affiliates with respect to any ongoing, frozen, terminated, or other
single-employer plan of Seller or the single-employer plan of any ERISA
Affiliate. There has been no “reportable
event,”
within
the meaning of ERISA Section
4043,
for which the 30-day reporting requirement has not been waived by any ongoing,
frozen, terminated or other single employer plan of Seller or of an ERISA
Affiliate.
(i) Except
as
disclosed in Section 4.15 of the Seller Disclosure Memorandum, no Seller Entity
has any Liability for retiree health or life benefits under any of the Seller
Benefit Plans, or other plan or arrangement, and there are no restrictions
on
the rights of such Seller Entity to amend or terminate any such retiree health
or benefit Plan without incurring any Liability thereunder except to the extent
required under Part 6 of Title I of ERISA or Code Section 4980B. No Tax under
Code Sections 4980B or 5000 has been incurred with respect to any Seller Benefit
Plan, or other plan or arrangement, and no circumstance exists which could
give
rise to such Taxes.
(j) Except
as
disclosed in Section 4.15 of the Seller Disclosure Memorandum, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, or otherwise) becoming
due to any director or any employee of any Seller Entity from any Seller Entity
under any Seller Benefit Plan or otherwise, (ii) increase any benefits
otherwise payable under any Seller Benefit Plan, or (iii) result in any
acceleration of the time of payment or vesting of any such benefit, or any
benefit under any life insurance owned by any Seller Entity or the rights of
any
Seller Entity in, to or under any insurance on the life of any current or former
officer, director, or employee of any Seller Entity, or change any rights or
obligations of any Seller Entity with respect to such insurance.
(k) The
actuarial present values of all accrued deferred compensation entitlements
(including entitlements under any executive compensation, supplemental
retirement, or employment agreement) of employees and former employees of any
Seller Entity and their respective beneficiaries, other than entitlements
accrued pursuant to funded retirement plans, whether or not subject to the
provisions of Code Section 412 or ERISA Section 302, have been fully reflected
on the Seller Financial Statements to the extent required by and in accordance
with GAAP.
(l) All
individuals who render services to any Seller Entity and who are authorized
to
participate in a Seller Benefit Plan pursuant to the terms of such Seller
Benefit Plan are in fact eligible to and authorized to participate in such
Seller Benefit Plan.
(m)
Neither
the Seller nor any of its ERISA Affiliates has had an “obligation to contribute”
(as defined in ERISA Section 4212) to, or other obligations or Liability in
connection with, a “multiemployer plan” (as defined in ERISA Sections 4001(a)(3)
or 3(37)(A)).
(n) Except
as
disclosed in Section 4.15 of the Seller Disclosure Memorandum, there are no
payments or changes in terms due to any insured person as a result of this
Agreement, the Merger or the transactions contemplated herein, under any
bank-owned, corporate-owned split dollar life insurance, other life insurance,
or similar arrangement or Contract, and the Successor Corporation shall, upon
and after the Effective Time, succeed to and have all the rights in, to and
under such life insurance Contracts as Seller presently holds. Each Seller
Entity will, upon the execution and delivery of this Agreement, and will
continue to have, notwithstanding this Agreement or the consummation of the
transaction contemplated hereby, all ownership rights and interest in all
corporate or bank-owned life insurance.
(a) Except
as
disclosed in Section 4.16 of the Seller Disclosure Memorandum or otherwise
reflected in the Seller Financial Statements, none of the Seller Entities,
nor
any of their respective Assets, businesses, or operations, is a party to, or
is
bound or affected by, or receives benefits under, (i) any employment,
severance, termination, consulting, or retirement Contract providing for
aggregate payments to any Person in any calendar year in excess of $25,000,
(ii) any Contract relating to the borrowing of money by any Seller Entity
or the guarantee by any Seller Entity of any such obligation (other than
Contracts evidencing the creation of deposit liabilities, purchases of federal
funds, advances from the Federal Reserve Bank or Federal Home Loan Bank, entry
into repurchase agreements fully secured by U.S. government securities or U.S.
government agency securities, advances of depository institution Subsidiaries
incurred in the ordinary course of Seller’s business, and trade payables and
Contracts relating to borrowings or guarantees made in the ordinary course
of
Seller’s business), (iii) any Contract which prohibits or restricts any
Seller Entity or any personnel of a Seller Entity from engaging in any business
activities in any geographic area, line of business or otherwise in competition
with any other Person, (iv) any Contract involving Intellectual Property (other
than Contracts entered into in the ordinary course with customers or
“shrink-wrap” software licenses), (v) any Contract relating to the
provision of data processing, network communication, or other technical services
to or by any Seller Entity, (vi) any Contract relating to the purchase or
sale of any goods or services (other than Contracts entered into in the ordinary
course of business and involving payments under any individual Contract or
series of contracts not in excess of $25,000), (vii) any exchange-traded or
over-the-counter swap, forward, future, option, cap, floor, or collar financial
Contract, or any other interest rate or foreign currency protection Contract
or
any Contract that is a combination thereof not included on its balance sheet,
and (viii) any other Contract that would be required to be filed as an
exhibit to a Form 10-KSB filed by Seller as of the date of this Agreement
pursuant to the reporting requirements of the Exchange Act (together with all
Contracts referred to in Sections 4.11 and 4.15(a), the “Seller
Contracts”
).
(b) With
respect to each Seller Contract and except as disclosed in Section 4.16(b)
of
the Seller Disclosure Memorandum: (i) the Contract is in full force and
effect; (ii) no Seller Entity is in Default thereunder; (iii) no
Seller Entity has repudiated or waived any material provision of any such
Contract; (iv) no other party to any such Contract is, to Seller’s
Knowledge, in Default in any respect or has repudiated or waived each material
provision thereunder; and (v) no consent which has not been or will not be
obtained is required by a Contract for the execution, delivery, or performance
of this Agreement, the consummation of the Merger or the other transactions
contemplated hereby. Section 4.16(b) of the Seller Disclosure Memorandum lists
every consent required by any Contract involving an amount in excess of
$100,000. All of the indebtedness of any Seller Entity for money borrowed is
prepayable at any time by such Seller Entity without penalty, premium or charge,
except as specified in Section 4.16(b) of the Seller Disclosure
Memorandum.
(a) Each
Seller Entity is the sole owner of all individually identifiable personal
information relating to identifiable or identified natural person (“IIPI”)
relating to customers, former customers, and prospective customers that will
be
transferred to Buyer and the Buyer Entities pursuant to this
Agreement.
(b) Each
Seller Entity’s collection and use of such IIPI the transfer of such IIPI to
Buyer and the Buyer Entities, and the use of such IIPI by the Buyer Entities
as
contemplated by this Agreement, complies with Seller’s privacy policy, the Fair
Credit Reporting Act, the Gramm-Leach-Bliley Act, and all other applicable
privacy Laws, and any Seller Entity Contract and industry standards relating
to
privacy.
Except
as
disclosed in Section 4.18 of the Seller Disclosure Memorandum, there is no
Litigation instituted or pending, or, to the Knowledge of Seller, threatened
(or
unasserted but considered probable of assertion) against any Seller Entity,
or
to Seller’s Knowledge, against any director, officer, employee, or agent of any
Seller Entity in their capacities as such or with respect to any service to
or
on behalf of any Employee Benefit Plan or any other Person at the request of
the
Seller Entity or Employee Benefit Plan of any Seller Entity, or against any
Asset, interest, or right of any of them, nor are there any Orders or judgments
outstanding against any Seller Entity. No claim for indemnity has been made
or,
to Seller’s Knowledge, threatened by any director, officer, employee,
independent contractor, or agent to any Seller Entity and to Seller’s knowledge,
no basis for any such claim exists.
Except
as
disclosed in Section 4.19 of Seller Disclosure Memorandum, since Seller’s
inception, each Seller Entity has timely filed all reports and statements,
together with any amendments required to be made with respect thereto, that
it
was required to file with Governmental Authorities. As of their respective
dates, each of such reports and documents, including the financial statements,
exhibits, and schedules thereto, complied in all material respects with all
applicable Laws. As of their respective dates, such reports and documents did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. Notwithstanding the foregoing provisions of this Section 4.19,
Seller Entities may have made immaterial late filings.
Seller
and each Seller Entity maintain accurate books and records reflecting its Assets
and Liabilities and maintains proper and adequate internal accounting controls
which provide assurance that (a) transactions are executed with management’s
authorization; (b) transactions are recorded as necessary to permit preparation
of the consolidated financial statements of Seller and to maintain
accountability for Seller’s consolidated Assets; (c) access to Seller’s Assets
is permitted only in accordance with management’s authorization; (d) the
reporting of Seller’s Assets is compared with existing Assets at regular
intervals; and (e) accounts, notes, and other receivables and inventory are
recorded accurately, and proper and adequate procedures are implemented to
effect the collection thereof on a current and timely basis.
Seller
has not, since its inception, extended or maintained credit, arranged for the
extension of credit, or renewed an extension of credit, in the form of a
personal loan to or for any director or executive officer (or equivalent
thereof) of Seller, except as permitted by Section 13(k) of the Exchange Act
and
Federal Reserve Regulation O. Section 4.21 of the Seller Disclosure Memorandum
identifies any loan or extension of credit maintained by Seller after
July
29, 2002 to which the second sentence of Section 13(k)(1)
of the Exchange Act applies or would apply if Seller were subject to such
Section.
No
Seller
Entity or, to Seller’s Knowledge, any Affiliate thereof has taken or agreed to
take any action or has any Knowledge of any fact or circumstance that is
reasonably likely to materially
impede or delay receipt of any required Consents or result in the imposition
of
a condition or restriction of the type referred to in the last sentence of
Section 8.1(b).
Each
Seller Entity has taken all necessary action, if any, to exempt the transactions
contemplated by this Agreement from, or if necessary to challenge the validity
or applicability of, any applicable “moratorium,” “fair price,” “business
combination,” “control share,” or other anti-takeover Laws, (collectively,
“Takeover
Laws”).
Except
for Seller Financial Advisor, neither Seller nor its Subsidiaries, or any of
their respective officers, directors, employees, or Representatives, has
employed any broker, finder, or investment banker or incurred any Liability
for
any financial advisory fees, investment bankers fees, brokerage fees,
commissions, or finder’s or other such fees in connection with this Agreement or
the transactions contemplated hereby. Seller has received the written opinion
of
the Seller Financial Advisor, dated the date of this Agreement, to the effect
that the consideration to be received in the Merger by the holders of Seller
Common Stock is fair, from a financial point of view, to such holders, a signed
copy of which has been or will be delivered to Buyer.
The
board
of directors of Seller, at a meeting duly called and held, has by unanimous
vote
of the directors present (i) determined that this Agreement and the
transactions contemplated hereby, including the Merger and the transactions
contemplated hereby and thereby, taken together, are fair to and in the best
interests of the Seller’s shareholders and (ii) resolved, subject to the
terms of this Agreement, to recommend that the holders of the shares of Seller
Common Stock approve this Agreement, the Merger, and the related transactions
and to call and hold a meeting of Seller’s shareholders to consider this
Agreement, the Merger, and the related transactions.
(a) No
statement, certificate, instrument, or other writing furnished or to be
furnished by any Seller Entity or any Affiliate thereof to Buyer pursuant
to
this Agreement or any other document, agreement, or instrument referred to
herein contains or will contain any untrue statement of material fact or
will
omit to state a material fact necessary to make the statements therein, in
light
of the circumstances under which they were made, not misleading.
(b) None
of
the information supplied or to be supplied by any Seller Entity or any Affiliate
thereof for inclusion in the Registration Statement to be filed by Buyer
with
the SEC will, when the Registration Statement becomes effective, be false
or
misleading with respect to any material fact, or omit to state any material
fact
necessary to make the statements therein, in
light
of
the circumstances under which they were made, not misleading. None of the
information supplied or to be supplied by the Seller Entity or any Affiliate
thereof for inclusion in any Proxy Statement/Prospectus to be mailed to Seller’s
shareholders in connection with Seller’s Shareholders’ Meeting, and any other
documents to be filed by any Seller Entity or any Affiliate thereof with the
SEC
or any other Regulatory Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed,
and
with respect to the any Proxy Statement/Prospectus, when first mailed to the
shareholders of Seller be false or misleading with respect to any material
fact,
or omit to state any material fact necessary to make the statements therein,
in
light of the circumstances under which they were made, not misleading, or,
in
the case of the Proxy Statement/Prospectus or any amendment thereof or
supplement thereto, at the time of the Seller’s Shareholders’ Meeting be false
or misleading with respect to any material fact, or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of any proxy for Seller’s Shareholders’ Meeting.
(c) All
documents that any Seller Entity or any Affiliate thereof is responsible for
filing with any Governmental Authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable Law.
Seller
has delivered to Buyer a complete Seller Disclosure Memorandum.
REPRESENTATIONS
AND WARRANTIES OF BUYER
Buyer
hereby represents and warrants to Seller as follows:
Buyer
is
a corporation duly organized, validly existing, and in good standing under
the
Laws of the State of South Carolina, and has the corporate power and authority
to carry on its business as now conducted and to own, lease, and operate its
Assets. Buyer is duly qualified or licensed to transact business as a foreign
corporation in good standing in the states of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of
its
business
requires it to be so qualified or licensed, except for such jurisdictions in
which the failure to be so qualified or licensed is not reasonably likely to
have, individually or in the aggregate, a Buyer Material Adverse
Effect.
(a) Buyer
has
the corporate power and authority necessary to execute, deliver, and perform
this Agreement, to perform its obligations under this Agreement, and to
consummate the transactions contemplated hereby. The execution, delivery,
and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly authorized
by all necessary corporate action in respect thereof on the part of Buyer.
This
Agreement represents a legal, valid, and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms (except in all cases
as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar Laws affecting the enforcement of
creditors’ rights generally and
except
that the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceeding may be brought).
(b) Neither
the execution and delivery of this Agreement by Buyer, nor the consummation
by
Buyer of the transactions contemplated hereby, nor compliance by Buyer with
any
of the provisions hereof, will (i) conflict with or result in a breach of
any provision of Buyer’s Articles of Incorporation or Bylaws, or
(ii) result in a Default under, or require any Consent pursuant to, or
result in the creation of any Lien on any Asset of any Buyer Entity under,
any
Contract or Permit of any Buyer Entity, or, (iii) subject to receipt of the
requisite Consents referred to in Section 8.1(b), constitute or result in a
Default under, or require any Consent pursuant to, any Law or Order applicable
to any Buyer Entity or any of their respective material Assets.
(c) Other
than in connection or compliance with the provisions of the Securities Laws,
applicable state corporate and securities Laws and other than Consents required
from Regulatory Authorities, and other than notices to or filings with the
IRS
or the Pension Benefit Guaranty Corporation with respect to any employee benefit
plans, and other than Consents, filings, or notifications which, if not obtained
or made, are not reasonably likely to have, individually or in the aggregate,
a
Buyer Material Adverse Effect, no notice to, filing with, or Consent of, any
Governmental Authority is necessary for the consummation by Buyer of the Merger
and the other transactions contemplated in this Agreement.
(a) Buyer
has
timely filed and made available to Seller all Exchange Act Documents required
to
be filed by Buyer since December 31, 2000 (together with all such Exchange
Act
Documents filed, whether or not required to be filed, the “Buyer
Exchange Act Reports”).
The
Buyer Exchange Act Reports (i) at the time filed, complied in all material
respects with the applicable requirements of the Securities Laws and other
applicable Laws and (ii) did not, at the time they were filed (or, if
amended or superseded by a filing prior to the date of this Agreement, then
on
the date of such amended or subsequent filing or, in the case of registration
statements, at the effective date thereof) contain any untrue statement of
a
material fact or omit to state a material fact required to be stated in such
Buyer Exchange Act Reports or necessary in order to make the statements in
such
Buyer Exchange Act Reports, in light of the circumstances
under which they were made, not misleading. No Buyer Subsidiary is required
to
file any Exchange Act Documents.
(b) Each
of
the Buyer Financial Statements (including, in each case, any related notes)
contained in the Buyer Exchange Act Reports, including any Buyer Exchange
Act
Reports filed after the date of this Agreement until the Effective Time,
complied, or will comply, as to form in all material respects with the
applicable published rules and regulations of the Exchange Act with respect
thereto, was prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
to such
financial statements or, in the case of unaudited interim statements, as
permitted by Form 10-Q of the Exchange Act), and fairly presented in all
material respects the consolidated financial position of Buyer and its
Subsidiaries as at the respective dates and the consolidated results of
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be material in
amount
or effect. The Buyer Financial Statements are certified to the extent required
by the Sarbanes-Oxley Act.
(c) Buyer’s
independent public accountants, which have expressed their opinion with respect
to the Financial Statements of Buyer included in Buyer’s Exchange Act Reports
(including the related notes), are and have been throughout the periods covered
by such Financial Statements (x) a registered public accounting firm (as defined
in Section 2(a)(12) of the Sarbanes-Oxley Act) (to the extent applicable during
such period), (y) “independent” with respect to Seller within the meaning of
Regulation S-X and, (z) with respect to Buyer, in compliance with subsections
(g) through (l) of Section 10A of the Exchange Act and related Securities
Laws.
(d) Buyer
maintains disclosure controls and procedures required by Rule 13a-15 or 15d-15
under the Exchange Act; such controls and procedures are effective to ensure
that all material information concerning Buyer is made known on a timely basis
to the individuals responsible for the preparation of Buyer’s Exchange Act
Documents.
Since
January 1, 2002, each Buyer Entity has filed all reports and statements,
together with any amendments required to be made with respect thereto, that
it
was required to file with Governmental Authorities. As of their respective
dates, each of such reports and documents, including the financial statements,
exhibits, and schedules thereto, complied in all material respects with all
applicable Laws. As of their respective date, each such report, statement and
document did not, in all material respects, contain any untrue statement of
a
material fact or omit to state a material fact required to be stated therein
or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
Neither
Buyer nor any of their respective officers, directors, employees, or
Representatives, has employed any broker or finder or insured any Liability
for
any financial advisory fees, investment bankers’ fees, brokerage fees,
commissions, or finder’s fees in connection with this Agreement or the
transactions contemplated hereby.
No
Buyer
Entity or any Affiliate thereof has taken or agreed to take any action or
has
any Knowledge of any fact or circumstance that is reasonably likely to
materially impede or delay receipt of any required Consents or result in
the
imposition of a condition or restriction of the type referred to in the last
sentence of Section 8.1(b).
Buyer
has
available to it, or as of the Effective Time will have available to it,
sufficient shares of authorized and unissued Buyer Common Stock and all funds
necessary for the issuance and payment of the Merger Consideration and has
funds
available to it to satisfy its payment obligations under this
Agreement.
(a) No
statement, certificate, instrument, or other writing furnished or to be
furnished by any Buyer Entity or any Affiliate thereof to Seller pursuant
to
this Agreement or any other document, agreement, or instrument referred to
herein contains or will contain any untrue
statement
of material fact or will omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) None
of
the information supplied or to be supplied by any Buyer Entity or any Affiliate
thereof for inclusion in the Registration Statement to be filed by Buyer with
the SEC will, when the Registration Statement becomes effective, be false or
misleading with respect to any material fact, or omit to state any material
fact
necessary to make the statements therein not misleading. None of the information
supplied by the Buyer Entity or any Affiliate thereof for inclusion in the
Registration Statement to be mailed to Seller’s shareholders in connection with
the Seller’s Shareholders’ Meeting, and any other documents to be filed by any
Buyer Entity or any Affiliate thereof with the SEC or any other Regulatory
Authority in connection with the transactions contemplated hereby, will, at
the
respective time such documents are filed, and with respect to the Registration
Statement, when first mailed to the shareholders of Seller be false or
misleading with respect to any material fact, or omit to state any material
fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or, in the case of the Registration
Statement or any amendment thereof or supplement thereto, at the time of the
Seller’s Shareholders’ Meeting be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
any
proxy for Seller’s Shareholders’ Meeting.
(c) All
documents that any Buyer Entity or any Affiliate thereof is responsible for
filing with any Governmental Authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable Law.
CONDUCT
OF BUSINESS PENDING CONSUMMATION
(a) From
the
date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement, unless the prior written consent of Buyer
shall
have been obtained, and except as otherwise expressly contemplated herein,
Seller shall, and shall cause each of its Subsidiaries to, (i) operate its
business only in the usual, regular, and ordinary course, (ii) use commercially
reasonable efforts to preserve intact its business organization and Assets
and
maintain its rights and franchises, (iii) use commercially reasonable efforts
to
cause its representations and warranties to be correct at all times, (iv)
use
best efforts to provide all information requested by Buyer related to loans
or
other transactions made by Seller with a value equal to or exceeding $300,000,
(v) consult with Buyer prior to entering into or making any loans or other
transactions with a value equal to or exceeding $600,000 other than residential
mortgage loans for which Seller has a commitment to buy from a reputable
investor, (vi) consult with Buyer prior to entering into or making any loans
that exceed regulatory loan to value guidelines, and (vii) take no action
which
would (A) adversely affect the ability of any Party to obtain any Consents
required for the transactions contemplated hereby without imposition of a
condition or restriction of the type referred to in the last sentences of
Sections 8.1(b) or 8.1(c), or (B) materially adversely affect the ability
of any
Party to perform its covenants and agreements under this
Agreement.
(b) From
the
date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement, unless the prior written consent of Seller shall
have been obtained, and except as otherwise expressly contemplated herein,
Buyer
shall, and shall cause each of its Subsidiaries to, (i) operate its business
only in the usual, regular, and ordinary course, (ii) use commercially
reasonable efforts to preserve intact its business organization and Assets
and
maintain its rights and franchises, (iii) use commercially reasonable efforts
to
cause its representations and warranties to be correct at all times, and (iv)
take no action which would (A) adversely affect the ability of any Party to
obtain any Consents required for the transactions contemplated hereby without
imposition of a condition or restriction of the type referred to in the last
sentences of Sections 8.1(b) or 8.1(c), or (B) materially adversely affect
the
ability of any Party to perform its covenants and agreements under this
Agreement.
(c) Seller
and Buyer each shall, and shall cause each of its Subsidiaries to, cooperate
with the other Party and provide all necessary corporate approvals, and
cooperate in seeking all approvals of any business combinations of such Seller
and its Subsidiaries requested by Buyer, provided,
the
effective time of such business combinations is on or after the Effective Time
of the Merger.
From
the
date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement, unless the prior written consent of Buyer shall
have been obtained, and except as otherwise expressly contemplated herein,
Seller covenants and agrees that it will not do or agree or commit to do, or
permit any of its Subsidiaries to do or agree or commit to do, any of the
following:
(a) amend
the
Articles of Incorporation, Bylaws, or other governing instruments of any
Seller
Entity;
(b) incur
any
additional debt obligation or other obligation for borrowed money in excess
of
an aggregate of $50,000 except in the ordinary course of the business of
any
Seller Entity consistent with past practices and
that
are prepayable without penalty, charge, or other payment (which exception
shall
include, for Seller Entities that are depository institutions, creation of
deposit liabilities, purchases of federal funds, advances from the Federal
Reserve Bank or Federal Home Loan Bank, and entry into repurchase agreements
fully secured by U.S. government securities or U.S. government agency
securities), or impose, or suffer the imposition, on any Asset of any Seller
Entity of any Lien or permit any such Lien to exist (other than in connection
with public
deposits, repurchase agreements, bankers’ acceptances, “treasury tax and loan”
accounts established in the ordinary course of business of Subsidiaries that
are
depository institutions, the satisfaction of legal requirements in the exercise
of trust powers, and Liens in effect as of the date hereof that are disclosed
in
the Seller Disclosure Memorandum);
(c) repurchase,
redeem, or otherwise acquire or exchange (other than exchanges in the ordinary
course under employee benefit plans), directly or indirectly, any shares,
or any
securities convertible into any shares, of the capital stock of any Seller
Entity, or declare or pay any dividend or make any other distribution in
respect
of Seller’s capital stock;
(d) except
for this Agreement, issue, sell, pledge, encumber, authorize the issuance
of,
enter into any Contract to issue, sell, pledge, encumber, or authorize the
issuance of, or otherwise permit to become outstanding, any additional shares
of
Seller Common Stock, any other capital stock of any Seller Entity, or any
Right;
(e) adjust,
split, combine, or reclassify any capital stock of any Seller Entity or issue
or
authorize the issuance of any other securities in respect of or in substitution
for shares of Seller Common Stock, or sell, lease, mortgage, or otherwise
dispose of or otherwise (i) any shares of capital stock of any Seller Subsidiary
or (ii) any Asset other than in the ordinary course of business for reasonable
and adequate consideration;
(f) except
for purchases of U.S. Government securities or U.S. Government agency
securities, which in either case have maturities of two years or less, purchase
any securities or make any material investment except in the ordinary course
of
business consistent with past practice, either by purchase of stock or
securities, contributions to capital, Asset transfers, or purchase of any
Assets, in any Person other than a wholly owned Seller Subsidiary, or otherwise
acquire direct or indirect control over any Person, other than in connection
with foreclosures of loans in the ordinary course of business;
(g)
(i)
except as contemplated by this Agreement, grant any bonus or increase in
compensation or benefits to the employees, officers or directors of any Seller
Entity (except in accordance with past practice and as disclosed on Schedule
6.2(g)), (ii) commit or agree to pay any severance or termination pay, or any
stay or other bonus to any Seller director, officer or employee (except for
the
payment of $400,000 to William C. Bochette, III according to the Employment
Agreement in the form of Exhibit
C),
(iii)
enter into or amend any severance agreements with officers, employees,
directors, independent contractors, or agents of any Seller Entity, (iv) change
any fees or other compensation or other benefits to directors of any Seller
Entity, or (v) waive any stock repurchase rights, accelerate, amend, or change
the period of exercisability of any Rights or restricted stock, or reprice
Rights granted under the Seller Stock Plans
or
authorize cash payments in exchange for any Rights; or accelerate or vest or
commit or agree to accelerate or vest any amounts, benefits or rights payable
by
any Seller Entity;
(h) enter
into or amend any employment Contract between any Seller Entity and any Person
(unless such amendment is required by Law) that the Seller Entity does not
have
the unconditional right to terminate without Liability (other than Liability
for
services already rendered), at any time on or after the Effective Time;
(i) adopt
any
new employee benefit plan of any Seller Entity or terminate or withdraw from,
or
make any material change in or to, any existing employee benefit plans, welfare
plans, insurance, stock or other plans of any Seller Entity other than any
such
change that is required by Law or to maintain continuous benefits at current
levels or that, in the written opinion of counsel, is necessary or advisable
to
maintain the tax qualified status of any such plan, or make any distributions
from such employee benefit or welfare plans, except as required by Law, the
terms of such plans or consistent with past practice;
(j) make
any
change in any Tax or accounting methods or systems of internal accounting
controls, except as may be appropriate and necessary to conform to changes
in
Tax Laws, regulatory accounting requirements, or GAAP;
(k) commence
any Litigation other than in accordance with past practice or settle any
Litigation involving any Liability of any Seller Entity for money damages
or
restrictions upon the operations of any Seller Entity;
(l) enter
into, modify, amend, or terminate any material Contract other than with respect
to those involving aggregate payments of less than, or the provision of goods
or
services with a market value of less than, $10,000 per annum and other than
Contracts covered by Section 6.2(m);
(m) except
in
the ordinary course of business consistent with past practice, make,
renegotiate, renew, increase, extend, modify or purchase any loan, lease (credit
equivalent), advance, credit enhancement or other extension of credit, or make
any commitment in respect of any of the foregoing, except, with respect to
any
extension of credit with an unpaid balance of less than $600,000, in conformity
with existing lending policies and practices, or waive, release, compromise,
or
assign any material rights or claims, or make any adverse changes in the mix,
rates, terms, or maturities of Seller’s deposits and other Liabilities;
(n) except
for loans or extensions of credit made on terms generally available to the
public, make or increase any loan or other extension of credit, or commit to
make or increase any such loan or extension of credit, to any director or
executive officer of Seller or the Bank, or any entity controlled, directly
or
indirectly, by any of the foregoing, other than renewals of existing loans
or
commitments to loan;
(o) restructure
or materially change its investment securities portfolio or its interest rate
risk position, through purchases, sales or otherwise, or the manner in which
the
portfolio is classified or reported;
(p) make
any
capital expenditures other than pursuant to binding commitments existing on
the
date hereof and other than expenditures necessary to maintain existing assets
in
good repair or to make payment of necessary taxes;
(q) establish
or commit to the establishment of any new branch or other office facilities
or
file any application to relocate or terminate the operation of any banking
office;
(r) take
any
action that is intended or expected to result in any of its representations
and
warranties set forth in this Agreement being or becoming untrue in any material
respect at any time prior to the Effective Time, or in any of the conditions
to
the Merger set forth in Article 8 not being satisfied or in a violation of
any
provision of this Agreement;
(s) implement
or adopt any change in its accounting principles, practices or methods, other
than as may be required by GAAP or regulatory guidelines;
(t) knowingly
take any action that would prevent or impede the Merger from qualifying as
a
reorganization within the meaning of Section 368(a) of the IRC;
(u) agree
to
take, make any commitment to take, or adopt any resolutions of its board
of
directors in support of, any of the actions prohibited by this Section
6.2;
(v) cause
the
Allowance to be less than 1.00% of loans and leases and other credits; or
(w) take
any
action or fail to take any action that at the time of such action or inaction
is
reasonably likely to prevent, or would be reasonably likely to materially
interfere with, the consummation of this Merger.
Each
Party agrees to give written notice promptly to the other Party upon becoming
aware of the occurrence or impending occurrence of any event or circumstance
relating to it or any of its Subsidiaries which (i) has had or is reasonably
likely to have, individually or in the aggregate, a Seller Material Adverse
Effect or a Buyer Material Adverse Effect, as applicable, (ii) would cause
or
constitute a material breach of any of its representations, warranties, or
covenants contained herein, or (iii) would be reasonably likely to prevent
or
materially interfere with the consummation of the Merger, and to use its
reasonable efforts to prevent or promptly to remedy the
same.
Each
of
Buyer and its Subsidiaries and Seller and its Subsidiaries shall file all
reports required to be filed by it with Regulatory Authorities between the
date
of this Agreement and the Effective Time and shall make available to the other
Party copies of all such reports promptly after the same are filed. Seller
and
its Subsidiaries shall also make available to Buyer monthly financial statements
and quarterly call reports. The financial statements of Buyer and Seller,
whether or not contained in any such reports filed under the Exchange Act or
with any other Regulatory Authority, will fairly present the consolidated
financial position of the entity filing such statements as of the dates
indicated and the consolidated results of operations, changes in shareholders’
equity, and cash flows for the periods then ended in accordance with GAAP
(subject in the case of interim financial statements to normal recurring
year-end adjustments that are not material). As of their respective dates,
such
reports of Buyer and Seller filed under the Exchange Act or with any other
Regulatory Authority will comply in all material respects with the Securities
Laws and will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were
made, not misleading. Any financial statements contained in any other reports
to
another Regulatory Authority shall be prepared in accordance with the Laws
applicable to such reports.
ADDITIONAL
AGREEMENTS
(a) Seller
will submit to its shareholders this Agreement and any other matters required
to
be approved or adopted by shareholders in order to carry out the intentions
of
this Agreement. In furtherance of that obligation, Seller will take, in
accordance with applicable law and its articles of incorporation and bylaws,
all
action necessary to call, give notice of, convene, and hold the Seller
Shareholder Meeting as promptly as practicable for the purpose of considering
and voting on approval and adoption of this Agreement and the transactions
provided for in this Agreement.
(b) Neither
the board of directors of Seller nor any committee thereof shall (i) except
as
expressly permitted by this Section, withdraw, qualify or modify, or propose
publicly to withdraw, qualify or modify, in a manner adverse to Buyer, the
approval or recommendation of such board of directors or such committee of
the
Merger or this Agreement, (ii) approve or recommend, or propose publicly to
approve or recommend, any Acquisition Proposal, or (iii) cause Seller to enter
into any letter of intent, agreement in principle, acquisition agreement, or
other document, instrument, or agreement (each, an “Acquisition
Agreement”)
related to any Acquisition Proposal. Notwithstanding the foregoing, in the
event
that, prior to the adoption of this Agreement by the holders of Seller Common
Stock, the board of directors of Seller determines in good faith that it has
received a Superior Proposal and, after receipt of a written opinion from
outside counsel, that the failure to accept the Superior Proposal would result
in the board of directors of Seller breaching its fiduciary duties to Seller
shareholders under applicable Law, the board of directors of Seller may (subject
to this and the following sentences) inform Seller shareholders that it no
longer believes that the Merger is advisable and no longer recommends approval
and may (subject to this Section) approve or recommend a Superior Proposal
(and
in connection therewith withdraw or modify its approval or
recommendation
of this Agreement and the Merger) (a “Subsequent Determination”), but
only at a time that is after the fifth business day following Buyer’s receipt of
written notice advising Buyer that the board of directors of Seller has received
a Superior Proposal specifying the material terms and conditions of such
Superior Proposal (and including a copy thereof with all accompanying
documentation, if in writing), identifying the person making such Superior
Proposal and stating that it intends to make a Subsequent Determination. After
providing such notice, Seller shall provide Buyer reasonable opportunity during
this five business day period to make such adjustments in the terms and
conditions of this Agreement as would enable Seller to proceed with its
recommendation to its shareholders without a Subsequent Determination;
provided, however, that any such adjustment shall be at the discretion
of the Parties at the time. Notwithstanding any other provision of this
Agreement, except to the extent prohibited by the SCBCA
determined by Seller after consultation with Seller’s counsel, Seller shall
submit this Agreement to its shareholders at its Shareholders’ Meeting even if
the board of directors of Seller determines at any time after the date hereof
that it is no longer advisable or recommends that Seller shareholders reject
it,
in which case the board of directors of Seller may communicate the basis for
its
lack of recommendation to the shareholders in the Proxy Statement/Prospectus
or
any appropriate amendment or supplement thereto.
(a) As
promptly as reasonably practicable following the date hereof, Buyer shall
prepare and file with the SEC a registration statement on Form S-4 with respect
to the issuance of Buyer Common Stock in the Merger (such Form S-4, and any
amendments or supplements thereto, the “Registration
Statement”).
The
Registration Statement shall contain proxy materials relating to the matters
to
be submitted to the Seller shareholders at the Seller Shareholder Meeting.
Such
proxy materials shall also constitute the prospectus relating to the shares
of
Buyer Common Stock to be issued in the Merger (such proxy statement-prospectus,
and any amendments or supplements thereto, the “Proxy
Statement/Prospectus”).
Seller will furnish to Buyer the information required to be included in the
Registration Statement with respect to its business and affairs and shall have
the right to review and consult with Buyer on the form of, and any
characterizations of such information included in, the Registration Statement
prior to its being filed with the SEC. Buyer shall use reasonable best efforts
to have the Registration Statement declared effective by the SEC and to keep
the
Registration Statement effective as long as is necessary to consummate the
Merger and the transactions contemplated hereby. Seller will use its reasonable
best efforts to cause the Proxy Statement/Prospectus to be mailed to its
shareholders as promptly as practicable after the Registration Statement is
declared effective under the Securities Act. Buyer will advise Seller, promptly
after it receives notice thereof, of the time when the Registration Statement
has become effective, the issuance of any stop order, the suspension of the
qualification of the Buyer Common Stock issuable in connection with the Merger
for offering or sale in any jurisdiction, or any request by the SEC for
amendment of the Proxy Statement/Prospectus or the Registration Statement.
If at
any time prior to the Effective Time any information relating to Buyer or
Seller, or any of their respective affiliates, officers or directors, should
be
discovered by Buyer or Seller which should be set forth in an amendment or
supplement to any of the Registration Statement or the Proxy
Statement/Prospectus so that any of such documents would not include any
misstatement of a material fact or omit to state any material fact necessary
to
make the statements therein, in light of the circumstances under which they
were
made, not misleading, the party that discovers such information shall promptly
notify the other party hereto and, to the extent required by law,
rules
or
regulations, an appropriate amendment or supplement describing such information
shall be promptly filed by Buyer with the SEC and disseminated by Seller to
its
shareholders.
(b) Seller
shall also take any action required to be taken under any applicable state
securities laws in connection with the Merger and each of Buyer and Seller
shall
furnish all information concerning it and the holders of Seller Common Stock
as
may be reasonably requested in connection with any such action.
(c) Prior
to
the Effective Time, Buyer shall notify the Nasdaq Stock Market of the additional
shares of Buyer Common Stock to be issued by Buyer in exchange for the shares
of
Seller Common Stock.
(a) No
Seller
Entity shall, nor shall it authorize or permit any of its Affiliates or
Representatives to, directly or indirectly (i) solicit, initiate, encourage,
or
induce the making, submission, or announcement of any Acquisition Proposal,
(ii)
participate in any discussions or negotiations regarding, or furnish to any
Person or “Group”
(as
such term is defined in Section 13(d) under the Exchange Act) any nonpublic
information with respect to, or take any other action
to
facilitate any inquiries or the making of any proposal that constitutes or
may
reasonably be expected to lead to, any Acquisition Proposal, (iii) subject
to
Section 7.3(c), approve, endorse, or recommend any Acquisition Proposal, or
(iv)
enter into any Acquisition Agreement contemplating or otherwise relating to
any
Acquisition Transaction; provided,
however, that
this
Section 7.3 shall not prohibit a Seller Entity from furnishing nonpublic
information regarding any Seller Entity to, or entering into a confidentiality
agreement or discussions or negotiations with, any Person or Group in response
to a bona
fide unsolicited
written Acquisition Proposal submitted by such Person or Group (and not
withdrawn) if (A) no Seller Entity or Representative or Affiliate thereof shall
have violated any of the restrictions set forth in this Section 7.3, (B) the
board of directors of Seller determines in its good faith judgment (based on,
among other things, the advice of the Seller Financial Advisor that such
Acquisition Proposal constitutes a Superior Proposal), (C) the board of
directors of Seller concludes in good faith, after consultation with and receipt
of a written opinion from its outside legal counsel, that the failure to take
such action would be inconsistent with its fiduciary duties, as such duties
would exist in the absence of this Section 7.3, to the shareholders of Seller
under applicable Law, (D) (1) at least five business days prior to furnishing
any such nonpublic information to, or entering into discussions or negotiations
with, such Person or Group, Seller gives Buyer written notice of the identity
of
such Person or Group and of Seller’s intention to furnish nonpublic information
to, or enter into discussions or negotiations with, such Person or Group, and
(2) Seller receives from such Person or Group an executed confidentiality
agreement containing terms no less favorable to the disclosing Party than the
confidentiality terms of this Agreement, and (E) contemporaneously with
furnishing any such nonpublic information to such Person or Group, Seller
furnishes such nonpublic information to Buyer (to the extent such nonpublic
information has not been previously furnished by Seller to Buyer). In addition
to the foregoing, Seller shall provide Buyer with at least five business days’
prior written notice of a meeting of the board of directors of Seller at which
meeting the board of directors of Seller is reasonably expected to resolve
to
recommend a Superior Proposal to its shareholders and together with such notice
a copy of the most recently proposed documentation relating to such Superior
Proposal;
provided, further,
that
Seller hereby agrees promptly to provide to Buyer any revised documentation
and
any Acquisition Agreement.
(b) In
addition to the obligations of Seller set forth in this Section 7.3, as promptly
as practicable, after any of the directors or executive officers of Seller
become aware thereof, Seller shall advise Buyer of any request received by
Seller for nonpublic information which Seller reasonably believes could lead
to
an Acquisition Proposal or of any Acquisition Proposal, the material terms
and
conditions of such request or Acquisition Proposal, and the identity of the
Person or Group making any such request or Acquisition Proposal. Seller shall
keep Buyer informed promptly of material amendments or modifications to any
such
request or Acquisition Proposal.
(c) Seller
shall, and shall cause its Subsidiaries directors, officers, employees, and
Representatives to immediately cease any and all existing activities,
discussions, or negotiations with any Persons conducted heretofore with respect
to any Acquisition Proposal and will use and cause to be used all commercially
reasonable best efforts to enforce any confidentiality or similar or related
agreement relating to any Acquisition Proposal.
(d) Nothing
contained in this Agreement shall prevent a Party or its board of directors
from
complying with Rule 14d-9 and Rule 14e-2 under the Exchange Act with respect
to
an Acquisition Proposal, provided,
that such
Rules will in no way eliminate or modify the effect that any action pursuant
to
such Rules would otherwise have under this Agreement.
The
Parties hereto shall cooperate with each other and use their reasonable efforts
to promptly prepare and file all necessary documentation and applications,
to
effect all applications, notices, petitions and filings, and to obtain as
promptly as practicable all Consents of all Regulatory Authorities and other
Persons which are necessary or advisable to consummate the transactions
contemplated by this Agreement (including the Merger). The Parties agree that
they will consult with each other with respect to the obtaining of all Consents
of all Regulatory Authorities and other Persons necessary or advisable to
consummate the transactions contemplated by this Agreement and each Party will
keep the other apprised of the status of matters relating to contemplation
of
the transactions contemplated herein. Each Party also shall promptly advise
the
other upon receiving any communication from any Regulatory Authority or other
Person whose Consent is required for consummation of the transactions
contemplated by this Agreement which causes such Party to believe that there
is
a reasonable likelihood that any requisite Consent will not be obtained or
that
the receipt of any such Consent will be materially delayed.
Subject
to the terms and conditions of this Agreement, each Party agrees to use, and
to
cause its Subsidiaries to use, its reasonable efforts to take, or cause to
be
taken, all actions, and to do, or cause to be done, all things necessary,
proper, or advisable under applicable Laws to consummate and make effective,
as
soon as reasonably practicable after the date of this Agreement, the
transactions contemplated by this Agreement, including using its reasonable
efforts to lift or rescind any Order adversely affecting its ability to
consummate the transactions contemplated herein and to cause to be satisfied
the
conditions referred to in Article 8; provided,
that nothing
herein shall preclude either Party from exercising its rights under this
Agreement.
(a) Prior
to
the Effective Time, each Party shall keep the other Party advised of all
material developments relevant to its business and the consummation of the
Merger and shall permit the other Party to make or cause to be made such
investigation of its business and properties (including that of its
Subsidiaries) and of their respective financial and legal conditions as the
other Party reasonably requests, provided,
that such
investigation shall be reasonably related to the transactions contemplated
hereby and shall not interfere unnecessarily with normal operations. No
investigation by a Party shall affect the ability of such Party to rely on
the
representations and warranties of the other Party.
Between
the date hereof and the Effective Time, Seller shall permit Buyer’s senior
officers and independent auditors to meet with the senior officers of Seller,
including officers responsible for the Seller Financial Statements, the internal
controls of Seller, and the disclosure controls and procedures of Seller
and
Seller’s independent public accountants, to discuss such matters as Buyer may
deem reasonably necessary or appropriate for Buyer to satisfy its obligations
under Sections 302, 404 and 906 of the Sarbanes-Oxley Act.
(b) In
addition to each Party’s obligations pursuant to Section 7.6(a), each Party
shall, and shall cause its advisors and agents to, maintain the confidentiality
of all confidential information furnished to it by the other Party
concerning its and its Subsidiaries’ businesses, operations, and financial
positions and shall not use such information for any purpose except in
furtherance of the transactions contemplated by this Agreement. If this
Agreement is terminated prior to the Effective Time, each Party shall promptly
return or certify the destruction of all documents and copies thereof, and
all
work papers containing confidential information received from the other
Party.
(c) Seller
shall use its reasonable efforts to exercise, and shall not waive any of, its
rights under confidentiality agreements entered into with Persons which were
considering an Acquisition Proposal with respect to Seller to preserve the
confidentiality of the information relating to the Seller Entities provided
to
such Persons and their Affiliates and Representatives.
(d) Each
Party agrees to give the other Party notice as soon as practicable after any
determination by it of any fact or occurrence relating to the other Party which
it has discovered through the course of its investigation and which represents,
or is reasonably likely to represent, either a material breach of any
representation, warranty, covenant, or agreement of the other Party or which
has
had or is reasonably likely to have a Seller Material Adverse Effect or a Buyer
Material Adverse Effect, as applicable.
Prior
to
the Effective Time, Seller and Buyer shall consult with each other as to the
form and substance of any press release, communication with Seller Shareholders,
or other public disclosure materially related to this Agreement, or any other
transaction contemplated hereby; provided,
that
nothing
in this Section 7.7 shall be deemed to prohibit any Party from making any
disclosure which its counsel deems necessary or advisable in order to satisfy
such Party’s disclosure obligations imposed by Law.
Each
Seller Entity shall take all necessary action to ensure that the entering into
of this Agreement and the consummation of the Merger and the other transactions
contemplated hereby do not and will not result in the grant of any rights to
any
Person under the Articles of
Incorporation,
Bylaws, or other governing instruments of any Seller Entity or restrict or
impair the ability of Buyer or any of its Subsidiaries to vote, or otherwise
to
exercise the rights of a shareholder with respect to, shares of any Seller
Entity that may be directly or indirectly acquired or controlled by
them.
(a) All
persons who are employees of the Seller Entities immediately prior to the
Effective Time and whose employment is not specifically terminated, if any,
at
or prior to the Effective Time (a “Continuing
Employee”)
shall,
at the Effective Time, become employees of First Community; provided,
however,
that in
no event shall any of the employees of the Seller Entities be officers of Buyer
or First Community, or have or exercise any power or duty conferred upon such
an
officer, unless and until duly elected or appointed to such position by the
board of directors of Buyer or First Community and in accordance with the bylaws
of Buyer or First Community. All of the Continuing Employees shall be employed
at the will of First Community and no contractual right to employment shall
inure to such employees because of this Agreement except as otherwise set forth
in this Agreement. For those employees of the Seller Entities who had executed
change of control agreements prior to November 29, 2005, Buyer
anticipates either honoring the terms of such agreements or offering a bonus
to
remain employed with Buyer or First Community. Notwithstanding the preceding,
such payment shall be reduced by any amount payable to such individual under
any
other applicable severance plan, program or policy, employment agreement, or
any
other arrangement providing for severance payment to such individual as a result
of involuntary termination of employment.
(b) As
of the
Effective Time, each Continuing Employee shall be eligible to participate in
Buyer’s 401(k) plan with full credit for prior service with Seller for purposes
of eligibility and vesting.
(c) As
of the
Effective Time, Buyer shall make available employer-provided health and other
employee welfare benefit plans to each Continuing Employee on the same basis
as
it provides such coverage to Buyer employees except that any pre-existing
condition, eligibility waiting period, or other limitations or exclusions
otherwise applicable under such plans to new employees shall not apply to a
Continuing Employee or their covered dependents who were covered under a similar
Seller plan at the Effective Time of the Merger.
(d) Simultaneously
herewith, William C. Bochette, III shall have entered into an Employment
Agreement with Buyer in the form of Exhibit
C.
This
agreement shall become effective at the Effective Time and shall replace the
existing employment agreement between Mr. Bochette and Seller or the Bank,
which shall terminate and have no further force or effect. Immediately prior
to
Closing and as set forth in the Employment Agreement, Mr. Bochette shall
terminate all his existing compensation agreements in exchange for a payment
from Seller that shall not constitute a parachute payment within the meaning
of
Section 280G of the Internal Revenue Code.
(e) Seller
shall use its reasonable best efforts to cause each of Seller’s directors to
execute and deliver an
agreement dated as of the date hereof in the form of Exhibit
A
pursuant
to which he or she will vote his or her shares of Seller Common Stock in favor
of this Agreement and the transactions contemplated hereby.
(f) No
officer, employee, or other Person (other than the corporate Parties to this
Agreement) shall be deemed a third party or other beneficiary of this Agreement,
and no such Person shall have any right or other entitlement to enforce any
provision of this Agreement or seek any remedy in connection with this
Agreement, except as set forth in Section 7.12.
Prior
to
the Effective Time, Seller and Buyer shall take all such steps as may be
required to cause any dispositions of Seller Common Stock (including derivative
securities with respect to Seller Common Stock) or acquisitions of Buyer
Common
Stock resulting from the transactions contemplated by this Agreement by each
individual who is subject to the reporting requirements of Section 16(a)
of the
Exchange Act with respect to Seller to be exempt under Rule 16b-3 promulgated
under the Exchange Act. Seller agrees to promptly furnish Buyer with all
requisite information necessary for Buyer to take the actions contemplated
by
this Section 7.10.
Seller
shall use its best efforts to cause each director, executive officer, and other
person who is an “affiliate” of Seller under Rule 145 of the Securities Act to
deliver to Buyer as soon as practicable and prior to the mailing of the Proxy
Statement/Prospectus executed letter agreements, each substantially in the
form
attached hereto as Exhibit
D,
providing that such person will comply with Rule 145, as
well
as claims letters in the form attached hereto as Exhibit
E.
(a) For
a
period of three years after the Effective Time, Buyer shall, and shall cause
the
Surviving Corporation to, indemnify, defend, and hold harmless the present
and
former directors, officers, employees, and agents of the Seller Entities (each,
an “Indemnified
Party”)
against all Liabilities arising out of actions or omissions arising out of
the
Indemnified Party’s service or services as directors, officers, employees, or
agents of Seller or, at Seller’s request, of another corporation, partnership,
joint venture, trust, or other enterprise occurring at or prior to the Effective
Time (including the transactions contemplated by this Agreement) to the fullest
extent permitted under the SCBCA,
Section
402 of the Sarbanes-Oxley Act, the Securities Laws and FDIC Regulations Part
359, and by Seller’s Articles of Incorporation and Bylaws as in effect on the
date hereof, including provisions relating to advances of expenses incurred
in
the defense of any Litigation and whether or not any Buyer Entity is insured
against any such matter.
(b) Prior
to
the Effective Time, Buyer shall purchase, or shall direct Seller to purchase,
an
extended reporting period endorsement under Seller’s existing directors’ and
officers’ liability insurance coverage (“Seller
D&O Policy”)
for
acts or omissions occurring prior to the Effective Time by such directors and
officers currently covered by Seller’s D&O Policy. The directors and
officers of Seller shall take all reasonable actions required by the insurance
carrier necessary to procure such endorsement. Such endorsement shall provide
such directors and officers with coverage following the Effective Time for
three
years or such lesser period of time as can be purchased for an aggregate amount
equal to three times the current annual premium for Seller’s D&O Policy (the
“Premium
Multiple”).
If
Buyer is unable to obtain or
maintain
the insurance coverage called for in this Section 7.12(b), then Buyer shall
obtain the most advantageous coverage that can be purchased for the Premium
Multiple.
(c) Any
Indemnified Party wishing to claim indemnification under paragraph (a) of
this
Section 7.12, upon learning of any such Liability or Litigation, shall promptly
notify Buyer and the Surviving Corporation thereof in writing. In the event
of
any such Litigation (whether arising before or after the Effective Time),
(i)
Buyer or the Surviving Corporation shall have the right to assume the defense
thereof and neither Buyer nor the Surviving Corporation shall be liable to
such
Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection
with
the defense thereof, except that if Buyer or the Surviving Corporation elects
not to assume such defense or counsel for the Indemnified Parties advises
that
there are substantive issues which raise conflicts of interest between Buyer
or
the Surviving Corporation and the Indemnified Parties, the Indemnified Parties
may retain counsel satisfactory to them, and Buyer or the Surviving Corporation
shall pay all reasonable fees and expenses of such counsel for the Indemnified
Parties promptly as statements therefor are received; provided,
that
Buyer
and the Surviving Corporation shall be obligated pursuant to this paragraph
(c)
to pay for only one firm of counsel for all Indemnified Parties in any
jurisdiction; (ii) the Indemnified Parties will cooperate in good faith
in the defense of any such Litigation; and (iii) neither Buyer nor the Surviving
Corporation shall be liable for any settlement effected without its prior
written consent and which does not provide for a complete and irrevocable
release of all Buyer’s Entities and their respective directors, officers, and
controlling persons, employees, agents, and Representatives; and provided,
further,
that
neither Buyer nor the Surviving Corporation shall have any obligation hereunder
to any Indemnified Party when and if a court of competent jurisdiction shall
determine, and such determination shall have become final, that the
indemnification of such Indemnified Party in the manner contemplated hereby
is
prohibited by applicable Law.
(d) If
Buyer
or the Surviving Corporation or any successors or assigns shall consolidate
with
or merge into any other Person and shall not be the continuing or surviving
Person of such consolidation or merger or shall transfer all or substantially
all of its assets to any Person, then and in each case, proper provision shall
be made so that the successors and assigns of Buyer or the Surviving Corporation
shall assume the obligations set forth in this Section 7.12.
(e) The
provisions of this Section 7.12 are intended to be for the benefit of and shall
be enforceable by, each Indemnified Party and their respective heirs and legal
and personal representatives.
CONDITIONS
PRECEDENT TO OBLIGATIONS TO CONSUMMATE
The
respective obligations of each Party to perform this Agreement and consummate
the Merger and the other transactions contemplated hereby are subject to the
satisfaction of the following conditions, unless waived by both Parties pursuant
to Section 10.6:
(a) Shareholder
Approval.
The
shareholders of Seller shall have approved this Agreement, and the consummation
of the transactions contemplated hereby, including the Merger, as and to the
extent required by Law and by the provisions of Seller’s Articles of
Incorporation and Bylaws.
(b) Regulatory
Approvals.
All
Consents of, filings and registrations with, and notifications to, all
Regulatory Authorities required for consummation of the Merger shall have
been
obtained or made and shall be in full force and effect and all waiting periods
required by Law shall have expired. No Consent obtained from any Regulatory
Authority which is necessary to consummate the transactions contemplated
hereby
shall be conditioned or restricted in a manner (including requirements relating
to the raising of additional capital or the disposition of Assets) which
in the
reasonable judgment of the board of directors of Buyer would so materially
adversely affect the economic or business benefits of the transactions
contemplated by this Agreement that, had such condition or requirement been
known, the Buyer would not, in its reasonable judgment, have entered into
this
Agreement.
(c) Consents
and Approvals.
Each
Party shall have obtained any and all Consents required for consummation
of the
Merger (other than those referred to in Section 8.1(b)) or for the preventing
of
any Default under any Contract or Permit of such Party which, if not obtained
or
made, would be reasonably likely to have, individually or in the aggregate,
a
Seller Material Adverse Effect or a Buyer Material Adverse Effect, as
applicable. Seller shall have obtained the Consents listed in Section
8.1(b) of the Seller Disclosure Memorandum, including Consents from the lessors
of each office leased by Seller, if any. No Consent so obtained which is
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner which in the reasonable judgment of
the
board of directors of Buyer would so materially adversely affect the economic
or
business benefits of the transactions contemplated by this Agreement that,
had
such condition or requirement been known, Buyer would not, in its reasonable
judgment, have entered into this Agreement.
(d) Registration
Statement; Blue Sky Laws.
The
Registration Statement shall have been declared effective by the SEC and no
proceedings shall be pending or threatened by the SEC to suspend the
effectiveness of the Registration Statement, and Buyer shall have received
all
required approvals by state securities or “blue sky” authorities with respect to
the transactions contemplated by this Agreement.
(e) Tax
Opinion.
Buyer
and Seller shall have received the opinion of Nelson Mullins Riley &
Scarborough LLP,
dated
as of the Closing, in form and substance customary in transactions of the type
contemplated hereby, and reasonably satisfactory to Buyer and Seller, as the
case may be, substantially to the effect that on the basis of the facts,
representations, and assumptions set forth in such opinion which are consistent
with the state of facts existing at the Effective Time, (i) the Merger will
be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the IRC, (ii) Buyer and Seller will each be a party to
that
reorganization within the meaning of Section 368(b) of the IRC, and (iii) except
to the extent of any cash received in lieu of a fractional share interest in
Buyer Common Stock, the shareholders of Seller will not recognize any gain
or
loss by exchanging their shares of Seller Common Stock for shares of Buyer
Common Stock pursuant to the Merger. Such opinion may be based on, in addition
to the review of such matters of fact and law as the opinion giver considers
appropriate, representations contained in certificates of officers of Buyer,
Seller, and others.
(f) Legal
Proceedings.
No
Governmental Authority of competent jurisdiction shall have enacted, issued,
promulgated, enforced, or entered any Law or Order (whether temporary,
preliminary or permanent) or taken any other action which prohibits, restricts,
or makes illegal consummation of the transactions contemplated by this
Agreement.
The
obligations of Buyer to perform this Agreement and consummate the Merger
and the
other transactions contemplated hereby are subject to the satisfaction of
the
following conditions, unless waived by Buyer pursuant to Section
10.6(a):
(a) Representations
and Warranties.
For
purposes of this Section 8.2(a), the accuracy of the representations and
warranties of Seller set forth in this Agreement shall be assessed as of
the
date of this Agreement and as of the Effective Time with the same effect
as
though all such representations and warranties had been made on and as of
the
Effective Time (provided,
thatrepresentations
and warranties which are confined to a specified date shall speak only as
of
such date). The representations and warranties set forth in Section 4.3 shall
be
true and correct (except for inaccuracies which are de
minimis
in
amount). There shall not exist inaccuracies in the representations and
warranties of Seller set forth in this Agreement (including the representations
and warranties set forth in Section 4.3) such that the aggregate effect of
such
inaccuracies has, or is reasonably likely to have, a Seller Material Adverse
Effect; provided,
that
for
purposes of this sentence only, those representations and warranties which
are
qualified by references to “material” or “Material Adverse Effect” or to the
“Knowledge” of any Person shall be deemed not to include such
qualifications.
(b) Performance
of Agreements and Covenants.
Each
and all of the agreements and covenants of Seller to be performed and complied
with pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied with
in
all material respects.
(c) Officers’
Certificate.
Seller
shall have delivered to Buyer (i) a certificate, dated as of the Closing Date
and signed on its behalf by its chief executive officer and its chief financial
officer, to the effect that the conditions set forth in Section 8.1 as it
relates to Seller and in Sections 8.2(a), 8.2(b), 8.2(g), 8.2(h), and 8.2(i)
have been satisfied.
(d) Secretary’s
Certificate.
Seller
Entities shall have delivered a certificate of the secretary of the Seller
Entities, dated as of the Closing Date, certifying as to (i) the incumbency
of
officers of the Seller Entities executing documents executed and delivered
in
connection herewith, (ii) a copy of the articles of incorporation of the Seller
as in effect from the date of this Agreement until the Closing Date, along
with
a certificate (dated not less than seven days prior to the Closing Date) of
the
Secretary of State of the State of South Carolina as to the good standing of
the
Seller; (iii) a copy of the bylaws of the Seller as in effect from the date
of
this Agreement until the Closing Date, (iv) a copy of the consent of Seller’s
board of directors authorizing and approving the applicable matters contemplated
hereunder, (v) certificate of the Federal Reserve Bank (dated not less than
seven days prior to the Closing Date) certifying that the Seller is a registered
bank holding company, (vi) a copy of the articles of incorporation of the Bank
as in effect from the date of this Agreement until the Closing Date, (vii)
a
copy of the bylaws of the Bank as in effect from the date of this Agreement
until the Closing Date, (viii) a certificate of the South Carolina State Board
of Financial Institutions (dated not less than seven days prior to the Closing
Date) as to the good standing of the Bank, and (ix) a certificate of the Federal
Deposit Insurance Corporation (dated not less than seven days prior to the
Closing Date) certifying that the Bank is an insured depository
institution.
(e) Legal
Opinions.
Buyer
shall have received legal opinions in form and substance satisfactory to Buyer
from Seller’s counsel as to the matters specified in Exhibit
F.
(f) Support
Agreements, Employment Agreement, and Affiliate Agreements.
The
Support Agreements in the form attached hereto as Exhibit
A
shall
have been executed by each of the directors and executive officers and delivered
to Buyer. An Employment Agreement in the form attached hereto as Exhibit
C
shall
have been executed by William C. Bochette, III and delivered to Buyer. Each
of
the directors and executive officers shall have executed Affiliate Agreements
in
the form attached hereto as Exhibit
D
and
claims letter in the form attached hereto as Exhibit
E
and
delivered same to Buyer.
(g) Notices
of Dissent.
Seller
shall not have received timely notice from its shareholders of their intent
to
exercise their statutory right to dissent with respect to more than 10% of
the
outstanding shares of Seller Common Stock.
(h) Shareholders
Equity; Allowance for Loan Losses.
At the
Effective Time, Seller’s shareholders’ equity
shall
not be less than $100,000 less than the amount reported in Seller’s November
2005 month-end financial report, without giving effect to (i) reasonable
expenses incurred by Seller in connection with the Merger or (ii) accumulated
other comprehensive income. Seller and the Bank shall maintain the Bank’s
allowance for loan losses at 1.00% of the Bank’s total outstanding loans
through additions to its allowances for loan losses by not later than the
Effective Time.
(i) Exercise
of Options.
William
C. Bochette, III shall not have exercised any Seller Options held by
Mr. Bochette following the execution of this Agreement.
(j) No
Material Adverse Effect.
There
shall not have occurred any Seller Material Adverse Effect from the September
30, 2005 balance sheet to the Effective Time with respect to Seller or the
Bank.
The
obligations of Seller to perform this Agreement and consummate the Merger and
the other transactions contemplated hereby are subject to the satisfaction
of
the following conditions, unless waived by Seller pursuant to Section
10.6(b):
(a) Representations
and Warranties.
For
purposes of this Section 8.3(a), the accuracy of the representations and
warranties of Buyer set forth in this Agreement shall be assessed as of the
date
of this Agreement and as of the Effective Time with the same effect as though
all such representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). There shall not exist
inaccuracies in the representations and warranties of Buyer set forth in this
Agreement such that the aggregate effect of such inaccuracies has, or is
reasonably likely to have, a Buyer Material Adverse Effect; provided
that,
for
purposes of this sentence only, those representations and warranties which
are
qualified by references to “material” or “Material Adverse Effect” or to the
“Knowledge” of any Person shall be deemed not to include such
qualifications.
(b) Performance
of Agreements and Covenants.
Each
and all of the agreements and covenants of Buyer to be performed and complied
with pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied with
in
all material respects.
(c) Officers’
Certificate.
Buyer
shall have delivered to the Seller a certificate, dated as of the Closing Date
and signed on its behalf by its chief executive officer and its chief financial
officer,
to the effect that the conditions set forth in Section 8.1 as it relates to
Buyer and in Sections 8.3(a), 8.3(b), and 8.3(g) have been satisfied.
(d) Secretary’s
Certificate.
Buyer
Entities shall have delivered a certificate of the secretary of the Buyer
Entities, dated as of the Closing Date, certifying as to (i) the incumbency
of
officers of the Buyer Entities executing documents executed and delivered
in
connection herewith, (ii) a copy of the articles of incorporation of the
Buyer
as in effect from the date of this Agreement until the Closing Date, along
with
a certificate (dated not less than seven days prior to the Closing Date)
of the
Secretary of State of the State of South Carolina as to the good standing
of the
Seller; (iii) a copy of the bylaws of the Buyer as in effect from the date
of
this Agreement until the Closing Date, (iv) a copy of the consent of Buyer’s
board of directors authorizing and approving the applicable matters contemplated
hereunder, (v) a certificate of the Federal Reserve Bank (dated not less
than
seven days prior to the Closing Date) certifying that the Buyer is a registered
bank holding company, (vi) a copy of the articles of association of First
Community as in effect from the date of this Agreement until the Closing
Date,
(vii) a copy of the bylaws of First Community as in effect from the date
of this
Agreement until the
Closing Date, (viii) a certificate of the Office
of the Comptroller of the Currency (dated not less than seven days prior to
the
Closing Date) as to the good standing of First Community, and (ix) certificate
of the Federal Deposit Insurance Corporation (dated not less than seven days
prior to the Closing Date) certifying that First Community is an insured
depository institution.
(e) Payment
of Merger Consideration.
Buyer
shall pay the Merger Consideration as provided by this Agreement.
(f) Legal
Opinions.
Seller
shall have received legal opinions in form and substance satisfactory to Seller
from Buyer’s counsel as to the matters specified in Exhibit
G.
(g) No
Material Adverse Effect. There
shall not have occurred any Buyer Material Adverse Effect from the September
30,
2005 balance sheet to the Effective Time with respect to Buyer.
TERMINATION
Notwithstanding
any other provision of this Agreement, and notwithstanding the approval of
this
Agreement by the shareholders of Seller, this Agreement may be terminated and
the Merger abandoned at any time prior to the Effective Time:
(a) By
mutual
written agreement of Buyer and Seller; or
(b) By
either
Party (provided,
that
the
terminating Party is not then in material breach of any representation,
warranty, covenant, or other agreement contained in this Agreement) in the
event
of a breach by the other Party of any representation or warranty contained
in
this Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach and which breach
is reasonably likely, in the opinion of the non-breaching Party, to permit
such
Party to refuse to consummate the transactions contemplated by this Agreement
pursuant to the standard set forth in Section 8.2 or 8.3 as applicable;
or
(c) By
either
Party in the event (i) any Consent of any Regulatory Authority required for
consummation of the Merger and the other transactions contemplated hereby
shall
have been denied by final nonappealable action of such authority or if any
action taken by such authority is not appealed within the time limit for
appeal,
(ii) any Law or Order permanently restraining, enjoining or otherwise
prohibiting the consummation of the Merger shall have become final and
nonappealable, or (iii) the shareholders of Seller fail to vote their approval
of the matters relating to this Agreement and the transactions contemplated
hereby at Seller’s Shareholders’ Meeting where such matters were presented to
such shareholders for approval and voted upon; or
(d) By
either
Party in the event that the Merger shall not have been consummated by October
31, 2006, if the failure to consummate the transactions contemplated hereby
on
or before such date is not caused by any breach of this Agreement by the
Party
electing to terminate pursuant to this Section 9.1; or
(e) By
Buyer
(provided, that Buyer is not then in material breach of any representation,
warranty, covenant, or other agreement contained in this Agreement) in the
event
that (i) theboard of directors of Seller, shall have failed to reaffirm
its approval upon Buyer’s request for such reaffirmation of the Merger and the
transactions contemplated by this Agreement (to the exclusion of any other
Acquisition Proposal), or shall have resolved not to reaffirm the Merger,
or
(ii) the board of directors of Seller shall have failed to include in the
Proxy
Statement/Prospectus its recommendation, without modification or qualification,
that Seller shareholders approve the Merger or shall have withdrawn, qualified
or modified, or proposed publicly to withdraw, qualify or modify, in a manner
adverse to Buyer, the recommendation of such board of directors to Seller
shareholders that they approve the Merger, or (iii) the board of directors
of
Seller shall have affirmed, recommended, or authorized entering into any
Acquisition Transaction other than the Merger or, within 5 business days
after
commencement of any tender or exchange offer for any shares of Seller Common
Stock, the board of directors of Seller shall have made any recommendation
other
than against acceptance of such tender or exchange offer by its shareholders,
or
(iv) the board of directors of Seller negotiates or authorizes the conduct
of
negotiations (and five business days have elapsed without such negotiations
being discontinued) with a third party (it being understood and agreed that
“negotiate” shall not be deemed to include the provision of information to, or
the request and receipt of information from, any Person that submits an
Acquisition Proposal or discussions regarding such information for the sole
purpose of ascertaining the terms of such Acquisition Proposal and determining
whether the board of directors will in fact engage in, or authorize,
negotiations) regarding an Acquisition Proposal other than the Merger; provided,
however, that this Agreement may not be terminated by Buyer pursuant to this
section (e) if the Merger is approved by the requisite vote of the shareholders
of the Seller; or
(f) By
Seller (provided,
that
Seller
is not then in material breach of any representation, warranty, covenant, or
other agreement contained in this Agreement), if prior to the approval of this
Agreement by the affirmative vote of the holders of the requisite number of
the
outstanding shares of Seller Common Stock entitled to vote thereon at the Seller
Shareholders’ Meeting, the board of directors of Seller has (x) withdrawn
or modified or changed its recommendation or approval of this Agreement in
a
manner adverse to Buyer in order to approve and permit Seller to accept a
Superior Proposal and (y) determined, after consultation with, and the receipt
of advice from outside legal counsel to Seller, that the failure to take such
action as set forth in the preceding clause (x) would be likely to result in
a
breach of the board of directors’ fiduciary duties under applicable Law,
provided,
however,
that at
least five
business
days prior to any such termination, Seller shall, and shall cause its advisors
to, negotiate with Buyer, if Buyer elects to do so, to make such adjustments
in
the terms and conditions of this Agreement as would enable Seller to proceed
with the transactions contemplated herein on such adjusted terms.
(g) By
Seller, at any time during the three business day period commencing on the
Determination Date, if the Final Buyer Stock Price is less than $15.32, subject,
however, to the following three sentences. If Seller elects to exercise its
termination right pursuant to this section, it shall give prompt written
notice
to Buyer; provided, that such notice of election to terminate may be withdrawn
at any time within the aforementioned three business
day period. During the three business
day
period commencing with its receipt of such notice, Buyer shall have the option
to elect to increase the Per Share Purchase Price so that it would equal
$15.32.
If Buyer makes an election contemplated by the preceding sentence, within
such
three business
day
period, it shall give prompt written notice to Seller of such election and
the
revised Per Share Purchase Price, whereupon no termination shall be deemed
to
have occurred pursuant to this section and this Agreement shall remain in
effect
in accordance with its terms (except as the Per Share Purchase Price shall
have
been so modified), and any references in this Agreement to the “Per Share
Purchase Price” shall thereafter be deemed to refer to the Per Share Purchase
Price as adjusted pursuant to this section; or
(h) By
Buyer
if at any time during the three business day period commencing on the
Determination Date, if the Final Buyer Stock Price is more than $22.98, subject,
however, to the following three sentences. If Buyer elects to exercise its
termination right pursuant to this section, it shall give prompt written notice
to Seller; provided, that such notice of election to terminate may be withdrawn
at any time within the aforementioned three business day period. During the
three business day period commencing with its receipt of such notice, Seller
shall have the option to elect to adjust the Per Share Purchase Price so that
it
would equal $22.98; provided, however, that the Per Share Purchase Price shall
not be decreased in a manner that would cause the failure of the condition
set
forth in Section 8.1(e) hereof. If Seller makes an election contemplated by
the
preceding sentence, within such three business day period, it shall give prompt
written notice to Buyer of such election and the revised Per Share Purchase
Price, whereupon no termination shall be deemed to have occurred pursuant to
this section and this Agreement shall remain in effect in accordance with its
terms (except as Per Share Purchase Price shall have been so modified), and
any
references in this Agreement to the “Per Share Purchase Price” shall thereafter
be deemed to refer to the Per Share Purchase Price as adjusted pursuant to
this
section.
In
the
event of the termination and abandonment of this Agreement by either Buyer
or
Seller pursuant to Section 9.1, this Agreement shall become void and have no
effect, except that (i) the provisions of Sections 7.6, 9.2, 9.3, 10.2, and
10.3
shall survive any such termination and abandonment, and (ii) no such termination
shall relieve the breaching Party from Liability resulting from any breach
by
that Party of this Agreement.
(a) If
Buyer
terminates this Agreement pursuant to Section 9.1(e) of this Agreement or Seller
terminates this Agreement pursuant to Section 9.1(f) of this Agreement and
within 12 months of such termination (A) an Acquisition Transaction has been
announced with respect to any Seller Entity or (B) an Acquisition Agreement
with
respect to an Acquisition Transaction
has
been entered into with respect to Seller or any Seller Entity, then Seller
shall
pay to Buyer its reasonable out-of-pocket expenses of the Merger, not to exceed
$150,000, promptly after receipt by Seller of an itemized statement of such
expenses and, further, upon the consummation of the Acquisition Transaction,
Seller shall pay to Buyer the sum of $500,000 less the amount paid for Buyer’s
out-of-pocket expenses (each payment a “Termination Fee”). The Termination Fee
shall be paid to Buyer in same day funds. Seller hereby waives any right to
set-off or counterclaim against such amount.
(b) If
this
Agreement is terminated following commencement of any tender or exchange
offer
for more than 50% of the shares of Seller Common Stock and within 12 months
of
such termination an Acquisition Transaction has occurred involving the tender
offeror or its affiliates and Seller or any Seller Entity, then Seller shall
pay
to Buyer the Termination Fee described above in same day funds.
(c) The
Parties acknowledge that the agreements contained in this Article 9 are an
integral part of the transactions contemplated by this Agreement, and that
without these agreements, they would not enter into this Agreement; accordingly,
if Seller fails to paypromptly any fee payable by it pursuant to this
Section 9.3, then Seller shall pay to Buyer its reasonable costs and expenses
(including reasonable attorneys’ fees) in connection with collecting such
Termination Fee, together with interest on the amount of the fee at the prime
annual rate of interest (as published in The
Wall Street Journal)
plus 2%
as the same is in effect from time to time from the date such payment was
due
under this Agreement until the date of payment.
Except
for Article 2, Sections 7.6(b), 7.8, 7.9, and 7.12, and this Article 9, the
respective representations, warranties, obligations, covenants, and agreements
of the Parties shall not survive the Effective Time.
MISCELLANEOUS
(a) Except
as
otherwise provided herein, the capitalized terms set forth below shall have
the
following meanings:
“Acquisition
Agreement”
shall
have the meaning as set forth in the Section 7.1(b) of the
Agreement.
“Acquisition
Proposal”
means
any proposal (whether communicated to Seller or publicly announced to Seller’s
shareholders) by any Person (other than Buyer or any of its Affiliates) for
an
Acquisition Transaction involving Seller or any of its present or future
consolidated Subsidiaries, or any combination of such Subsidiaries, the assets
of which constitute 5% or more of the consolidated assets of Seller as reflected
on Seller’s consolidated statement of condition prepared in accordance with
GAAP.
“Acquisition
Transaction”
means
any transaction or series of related transactions (other than the transactions
contemplated by this Agreement) involving: (i) any acquisition or purchase
from Seller by any Person or Group (other than Buyer or any of its Affiliates)
of 25% or more in interest of the total outstanding voting securities of Seller
or any of its
Subsidiaries,
or any tender offer or exchange offer that if consummated would result in any
Person or Group (other than Buyer or any of its Affiliates) beneficially owning
25% or more in interest of the total outstanding voting securities of Seller
or
any of its Subsidiaries, or any merger, consolidation, business combination
or
similar transaction involving Seller pursuant to which the shareholders of
Seller immediately preceding such transaction hold less than 75% of the equity
interests in the surviving or resulting entity (which includes the parent
corporation of any constituent corporation to any such transaction) of such
transaction; (ii) any sale or lease (other than in the ordinary course of
business), or exchange, transfer, license (other than in the ordinary course
of
business), acquisition or disposition of 5% or more of the assets of Seller;
or
(iii) any liquidation or dissolution of Seller.
“Affiliate”
of a
Person means: (i) any other Person directly, or indirectly through one or
more intermediaries, controlling, controlled by or under common control with
such Person; (ii) any officer, director, partner, employer, or direct or
indirect beneficial ownerof any 10% or greater equity or voting interest
of such Person; or (iii) any other Person for which a Person described in
clause (ii) acts in any such capacity.
“Agreement”
shall
have the meaning as set forth in the introduction of the Agreement.
“Allowance”
shall
have the meaning as set forth in the Section 4.9(a) of the
Agreement.
“Articles
of Merger” shall
have the meaning as set forth in the Section 1.3 of the Agreement.
“Assets”
of a
Person means all of the assets, properties, businesses and rights of such Person
of every kind, nature, character and description, whether real, personal or
mixed, tangible or intangible, accrued or contingent, or otherwise relating
to
or utilized in such Person’s business, directly or indirectly, in whole or in
part, whether or not carried on the books and records of such Person, and
whether or not owned in the name of such Person or any Affiliate of such Person
and wherever located.
“Bank”
means
The Bank of Camden, a South Carolina state banking association and a wholly
owned Subsidiary of Seller.
“Bank
Merger”
shall
have the meaning as set forth in Section 3.5 of the Agreement.
“BHCA”
shall
have the meaning as set forth in the Section 4.1 of the Agreement.
“Buyer”
shall
have the meaning as set forth in the introduction of the Agreement.
“Buyer
Common Stock”
means
the common stock, par value $1.00 per share, of Buyer.
“Buyer
Entities”
means,
collectively, Buyer and all Buyer Subsidiaries.
“Buyer
Exchange Act Reports” shall
have the meaning as set forth in the Section 5.3(a) of the
Agreement.
“Buyer
Financial Statements”
means
(i) the consolidated balance sheets of Buyer as of September 30, 2005, and
the
related statements of income, changes in shareholders’ equity, and cash flows
(including related notes and schedules, if any) for the period ended September
30, 2005, and for each of the three fiscal years ended December 31, 2004, as
filed in amended form by Buyer in Exchange Act Documents, and (ii) the
consolidated balance sheets of Buyer (including related notes and schedules,
if
any) and related
statements
of income, changes in shareholders’ equity, and cash flows (including related
notes and schedules, if any) included in Exchange Act Documents, as amended,
filed with respect to periods ended subsequent to September 30, 2005.
“Buyer
Material Adverse Effect”
means an
event, change or occurrence which, individually or together with any other
event, change or occurrence, has a material adverse effect on (i)the financial
position, property, business, assets or results of operations of Buyer and
its
Subsidiaries, taken as a whole, or (ii) the ability of Buyer to perform its
obligations under this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement, provided,
that“Buyer
Material Adverse Effect” shall not be deemed to include the effects of
(A) changes in banking and other Laws of general applicability or
interpretations thereof by Governmental Authorities, (B) changes in GAAP or
regulatory accounting principles generally applicable to banks and their
holding
companies, (C) actions and omissions of Buyer (or any of its Subsidiaries)
taken with the prior written Consent of Seller in contemplation of the
transactions contemplated hereby, or (D) the direct effects of
compliance with this Agreement on the operating performance of Buyer.
Notwithstanding the foregoing, “Buyer Material Adverse Effect” shall not be
deemed to include any change in the per share price of Buyer’s Common Stock on
or after the date of execution of this Agreement by Seller.
“Buyer
Subsidiaries”
means
the Subsidiaries of Buyer, which shall include any corporation, bank, savings
association, limited liability company, limited partnership, limited liability
partnership or other organization acquired as a Subsidiary of Buyer in the
future and held as a Subsidiary by Buyer at the Effective Time.
“CERCLA”
shall
have the meaning as set forth in Section 10.1(a) of the Agreement.
“Certificates”
shall
have the meaning as set forth in Section 3.1(b) of the Agreement.
“Closing”
shall
have the meaning as set forth in Section 1.2 of the Agreement.
“Closing
Date”
means
the date on which the Closing occurs.
“Code”
means
the
Internal Revenue Code of 1986, and the rules and regulations promulgated
thereunder.
“Commissioner”
means
the South Carolina Commissioner of Banking.
“Consent”
means
any consent, approval, authorization, clearance, exemption, waiver, or similar
affirmation by any Person pursuant to any Contract, Law, Order, or
Permit.
“Contract”
means
any written or oral agreement, arrangement, authorization, commitment, contract,
indenture, instrument, lease, license, obligation, plan, practice, restriction,
understanding, or undertaking of any kind or character, or other document to
which any Person is a party or that is binding on any Person or its capital
stock, Assets or business.
“Converted
Options”
shall
have the meaning as set forth in Section 3.4(a) of the Agreement.
“Default”
means
(i) any breach or violation of, default under, contravention of, or
conflict with, any Contract, Law, Order, or Permit, (ii) any occurrence of
any event that with the passage of time or the giving of notice or both would
constitute a breach or violation of, default under, contravention of, or
conflict with, any Contract, Law, Order, or Permit, or (iii) any occurrence
of any event that with or without the passage of time or the
giving
of
notice would give rise to a right of any Person to exercise any remedy or obtain
any relief under, terminate or revoke, suspend, cancel, or modify or change
the
current terms of, or renegotiate, or to accelerate the maturity or performance
of, or to increase or impose any Liability under, any Contract, Law, Order,
or
Permit.
“Disqualified
Person”
shall
have the meaning as set forth in Section 4.15(f) of the Agreement.
“Dissenter
Shares”
shall
have the meaning as set forth in Section 3.1(a) of the Agreement.
“DOL”
shall
have the meaning as set forth in Section 4.15(b) of the Agreement.
“Effective
Time”
shall
have the meaning as set forth in Section 1.3 of the Agreement.
“Employee
Benefit Plan”
means
each pension, retirement, profit-sharing, deferred compensation, stock option,
employee stock ownership, share purchase, severance pay,
vacation,
bonus, retention, change in control or other incentive plan, medical, vision,
dental or other health plan, any life insurance plan, flexible spending account,
cafeteria plan, vacation, holiday, disability or any other employee benefit
plan
or fringe benefit plan, including any “employee benefit plan,” as that term is
defined in Section 3(3) of ERISA and any other plan, fund, policy, program,
practice, custom understanding or arrangement providing compensation or other
benefits, whether or not such Employee Benefit Plan is or is intended to be
(i)
covered or qualified under the Code, ERISA or any other applicable Law, (ii)
written or oral, (iii) funded or unfunded, (iv) actual or contingent or (v)
arrived at through collective bargaining or otherwise.
“Environmental
Laws”
shall
mean all Laws relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface
or
subsurface strata) and which are administered, interpreted or enforced by the
United States Environmental Protection Agency and state and local Governmental
Authorities with jurisdiction over, and including common law in respect of,
pollution or protection of the environment, including: (i) the Comprehensive
Environmental Response Compensation and Liability Act, 42 U.S.C. §§9601 et seq.
(“CERCLA”);
(ii)
the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act, 42 U.S.C. §§6901 et seq. (“RCRA”);
(iii)
the Emergency Planning and Community Right to Know Act (42 U.S.C. §§11001 et
seq.); (iv) the Clean Air Act (42 U.S.C. §§7401 et seq.); (v) the Clean Water
Act (33 U.S.C. §§1251 et seq.); (vi) the Toxic Substances Control Act (15 U.S.C.
§§2601 et seq.); (vii) any state, county, municipal or local statues, laws or
ordinances similar or analogous to the federal statutes listed in parts (i)
-
(vi) of this subparagraph; (viii) any amendments to the statues, laws or
ordinances listed in parts (i) - (vi) of this subparagraph, regardless of
whether in existence on the date hereof, (ix) any rules, regulations,
guidelines, directives, orders or the like adopted pursuant to or implementing
the statutes, laws, ordinances and amendments listed in parts (i) - (vii) of
this subparagraph; and (x) any other law, statute, ordinance, amendment, rule,
regulation, guideline, directive, order or the like in effect now or in the
future relating to environmental, health or safety matters and other Laws
relating to emissions, discharges, releases, or threatened releases of any
Hazardous Material, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
any
Hazardous Material.
“ERISA”
means
the Employee Retirement Income Security Act of 1974.
“ERISA
Affiliate”
means
any trade or business, whether or not incorporated, which together with a Seller
Entity would be treated as a single employer under Code Section 414 or would
be
deemed a single employer within the meaning of Sections.
“Exchange
Act”
means
the Securities Exchange Act of 1934, and the rules and regulations promulgated
thereunder.
“Exchange
Act Documents”
means
all forms, proxy statements, registration statements, reports, schedules, and
other documents, including all certifications and statements required by the
Exchange Act or Section 906 of the Sarbanes-Oxley Act with respect to any report
that is an Exchange Act Document, filed, or required to be filed, by a Party
or
any of its Subsidiaries with any Regulatory Authority pursuant to the Securities
Laws.
“Exchange
Agent”
shall
have the meaning as set forth in Section 3.2(a) of the Agreement.
“Excluded
Shares” shall
have the meaning as set forth in Section 3.1(d) of the Agreement.
“Exhibits”
means
the Exhibits so marked, copies of which are attached to this Agreement. Such
Exhibits are hereby incorporated by reference herein and made a part hereof,
and
may be referred to in this Agreement and any other related instrument or
document without being attached hereto or thereto.
“FDIC”
shall
mean the Federal Deposit Insurance Corporation.
“Federal
Reserve”
shall
mean the Board of Governors of the Federal Reserve System and the Federal
Reserve Bank of Richmond.
“Final
Buyer Stock Price”
shall
mean the average of the closing sale prices of Buyer Common Stock as reported
on
the Nasdaq Capital Market during the Measurement Period; provided, however,
that
in the event Buyer Common Stock does not trade on any one or more of the trading
days during the Measurement Period, any such date shall be disregarded in
computing the average closing sales price and the average shall be based upon
the closing sales prices and number of days on which Buyer Common Stock actually
traded during the Measurement Period.
“First
Community”
shall
have the meaning as set forth in Section 3.5 of the Agreement.
“GAAP”
shall
mean generally accepted accounting principles in the United States, consistently
applied during the periods involved.
“Governmental
Authority”
shall
mean any federal, state, local, foreign, or other court, board, body,
commission, agency, authority or instrumentality, arbitral authority,
self-regulatory authority, mediator, tribunal, including Regulatory Authorities
and Taxing Authorities.
“Group”
shall
have the meaning as set forth in Section 7.3(a) of the Agreement.
“Hazardous
Material”
shall
mean any chemical, substance, waste, material, pollutant, or contaminant defined
as or deemed hazardous or toxic or otherwise regulated under any Environmental
Law, including RCRA hazardous wastes, CERCLA hazardous substances, and HSRA
regulated substances, pesticides
and other agricultural chemicals, oil and petroleum products or byproducts
and
any constituents thereof, urea formaldehyde
insulation,
lead in paint or drinking water, mold, asbestos, and polychlorinated biphenyls
(PCBs): (i) any hazardous substance, hazardous material, hazardous waste,
regulated substance, or toxic substance (as those terms are defined by any
applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants,
petroleum, petroleum products, or oil (and specifically shall include asbestos
requiring abatement, removal, or encapsulation pursuant to the requirements
of
Environmental Law), provided, notwithstanding the foregoing or any other
provision in this Agreement to the contrary, the words “Hazardous Material”
shall not mean or include any such Hazardous Material used, generated,
manufactured, stored, disposed of or otherwise handled in normal quantities
in
the ordinary course of business in compliance with all applicable Environmental
Laws, or such that may be naturally occurring in any ambient air, surface water,
ground water, land surface or subsurface strata.
“Indemnified
Party”
shall
have the meaning as set forth in Section 7.12(a) of the
Agreement.
“Individually
Identifiable Personal Information” or “IIPI”
shall
have the meaning as set forth in Section 4.17(a) of the Agreement.
“Intellectual
Property”
means
copyrights, patents, trademarks, service marks, service names, trade names,
domain names, together with all goodwill associated therewith, registrations
and
applications therefor, technology rights and licenses, computer software
(including any source or object codes therefor or documentation relating
thereto), trade secrets, franchises, know-how, inventions, and other
intellectual property rights.
“IRS”
shall
have the meaning as set forth in Section 4.15(b) of the Agreement.
“Knowledge”
as used
with respect to a Person (including references to such Person being aware of
a
particular matter) means those facts that are known or should reasonably have
been known after due inquiry of the records and employees of such Person by
the
chairman, president, or chief financial officer, or any senior or executive
vice
president of such Person without any further investigation.
“Law”
means
any code, law (including common law), ordinance, regulation, reporting or
licensing requirement, rule, statute, regulation or order applicable to a Person
or its Assets, Liabilities or business, including those promulgated, interpreted
or enforced by any Regulatory Authority.
“Liability”
means
any direct or indirect, primary or secondary, liability, indebtedness,
obligation, penalty, cost or expense (including reasonable attorneys fees,
costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course
of
business) of any type, whether accrued, absolute or contingent, liquidated
or
unliquidated, matured or unmatured, or otherwise.
“Lien”
means
any conditional sale agreement, default of title, easement, encroachment,
encumbrance, hypothecation, infringement, lien, mortgage, pledge, reservation,
restriction, security interest, title retention or other security arrangement,
or any adverse right or interest, charge, or claim of any nature whatsoever
of,
on, or with respect to any property or any property interest, other than
(i) Liens for current property Taxes not yet due and payable,
and (ii) for
any depository institution, pledges to secure public deposits and other Liens
incurred in the ordinary course of the banking business.
“Litigation”
means
any action, arbitration, cause of action, lawsuit, claim, complaint, criminal
prosecution, governmental or other examination or investigation, audit (other
than regular audits of financial statements by outside auditors), compliance
review, inspection, hearing, administrative or other proceeding relating to
or
affecting a Party, its business, its Assets or Liabilities (including Contracts
related to Assets or Liabilities), or the transactions contemplated by this
Agreement, but shall not include regular, periodic examinations of depository
institutions and their Affiliates by Regulatory Authorities.
“Material”
or
“material”
for
purposes of this Agreement shall be determined in light of the facts and
circumstances of the matter in question; provided,
that
any
specific monetary amount stated in this Agreement shall determine materiality
in
that instance.
“Measurement
Period”
shall
mean the 20 consecutive trading days ending on the fifth calendar day
immediately prior to the date on which the Effective Time is to occur (such
day,
the “Determination
Date”).
“Merger”
shall
have the meaning as set forth in the Preamble of the Agreement.
“Merger
Consideration”
shall
have the meaning as set forth in Section 3.1(a) of the Agreement.
“Non-Competition
Agreement”
shall
have the meaning as set forth in Section 7.9(e) of the Agreement.
“OCC”
means
the federal Office of the Comptroller of the Currency.
“Off
Balance Sheet Arrangements”
shall
have the meaning as set forth in Section 4.6 of the Agreement.
“Operating
Property”
means
any property owned, leased, or operated by the Party in question or by any
of
its Subsidiaries or in which such Party or Subsidiary holds a security interest
or other interest (including an interest in a fiduciary capacity), and, where
required by the context, includes the owner or operator of such property, but
only with respect to such property.
“Order”
means
any administrative decision or award, decree, injunction, judgment, order,
quasi-judicial decision or award, directive, ruling, or writ of any Governmental
Authority.
“Participation
Facility”
means
any facility or property in which the Party in question or any of its
Subsidiaries participates in the management and, where required by the context,
means the owner or operator of such facility or property, but only with respect
to such facility or property.
“Party”
means
Seller, Buyer
or
Bank and “Parties”
means
two or more of such Persons.
“Party
in Interest”
shall
have the meaning as set forth in Section 4.15(f) of the Agreement.
“Permit”
means
any federal, state, local, and foreign Governmental Authority approval,
authorization, certificate, easement, filing, franchise, license, notice,
permit, or right to which any Person is a party or that is or may be binding
upon or inure to the benefit of any Person or its securities, Assets, or
business, the absence of which or a default under would constitute a Buyer
or
Seller Adverse Effect, as the case may be.
“Per
Share Purchase Price”
shall
have the meaning as set forth in Section 3.1(a) of the Agreement.
“Person”
means a
natural person or any legal, commercial or Governmental Authority, such as,
but
not limited to, a corporation, general partnership, joint venture, limited
partnership, limited liability company, limited liability partnership, trust,
business association, group acting in concert, or any person acting in a
representative capacity.
“Premium
Multiple”
shall
have the meaning as set forth in Section 7.12(b) of the Agreement.
“Prohibited
Transaction”
shall
have the meaning as set forth in Section 4.15(f) of the Agreement.
“Proxy
Statement/Prospectus”
shall
have the meaning as set forth in Section 7.2(a) of the Agreement.
“RCRA”
shall
have the meaning as set forth in Section 10.1(a) of the Agreement.
“Regulatory
Authorities”
means,
collectively, the SEC, the Nasdaq Stock Market, the NASD, the South Carolina
State Board of Financial Institutions, the OCC, the FDIC, the Department of
Justice, and the Federal Reserve and all other federal, state, county, local
or
other Governmental Authorities having jurisdiction over a Party or its
Subsidiaries.
“Reportable
Event”
shall
have the meaning as set forth in Section 4.15(h) of the Agreement.
“Representative”
means
any investment banker, financial advisor, attorney, accountant, consultant,
or
other representative or agent of a Person.
“Registration
Statement” shall
have the meaning as set forth in Section 7.2(a) of the Agreement.
“Rights”
shall
mean all arrangements, calls, commitments, Contracts, options, rights to
subscribe to, scrip, warrants, or other binding obligations of any character
whatsoever by which a Person is or may be bound to issue additional shares
of
its capital stock or other securities, securities or rights convertible into
or
exchangeable for, shares of the capital stock or other securities of a Person
or
by which a Person is or may be bound to issue additional shares of its capital
stock or other Rights.
“Sarbanes-Oxley
Act” means
the
Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated
thereunder.
“SCBCA”
means
the South Carolina Business Corporation Act of 1988.
“SEC”
means
the
United States Securities and Exchange Commission.
“Securities
Act”
means
the Securities Act of 1933, and the rules and regulations promulgated
thereunder.
“Securities
Laws”
means
the Securities Act, the Exchange Act, the Investment Company Act of 1940, the
Investment Advisors Act of 1940, the Trust Indenture Act of 1939, and the rules
and regulations of any Regulatory Authority promulgated thereunder.
“Seller”
shall
have the meaning as set forth in the introduction of the Agreement.
“Seller
Benefit Plan(s)”
shall
have the meaning as set forth in Section 4.15(a) of the Agreement.
“Seller
Common Stock”
means
the no par value common stock of Seller.
“Seller
Contracts”
shall
have the meaning as set forth in Section 4.16(a) of the Agreement.
“Seller
D&O Policy”
shall
have the meaning as set forth in Section 7.12(b) of the Agreement.
“Seller
Disclosure Memorandum”
means
the written information entitled “DeKalb Bankshares, Inc. Disclosure Memorandum”
delivered prior to the date of this Agreement to Buyer describing in reasonable
detail the matters contained therein and, with respect to each disclosure made
therein, specifically referencing each Section of this Agreement under which
such disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto.
“Seller
Entities”
means,
collectively, Seller and all Seller Subsidiaries.
“Seller
ERISA Plan”
shall
have the meaning as set forth in Section 4.15(a) of the Agreement.
“Seller
Exchange Act Reports”
shall
have the meaning as set forth in Section 4.5(a) of the Agreement.
“Seller
Financial Advisor”
means
The Orr Group.
“Seller
Financial Statements”
means
(i) the consolidated balance sheets of Seller as of September 30, 2005, and
the
related statements of income, changes in shareholders’ equity, and cash flows
(including related notes and schedules, if any) for the period ended September
30, 2005, and for each of the three fiscal years ended December 31, 2004, as
filed in amended form by Seller in Exchange Act Documents, and (ii) the
consolidated balance sheets of Seller (including related notes and schedules,
if
any) and related statements of income, changes in shareholders’ equity, and cash
flows (including related notes and schedules, if any) included in Exchange
Act
Documents, as amended, filed with respect to periods ended subsequent to
September 30, 2005.
“Seller
Material Adverse Effect”
means an
event, change or occurrence which, individually or together with any other
event, change or occurrence, has a material adverse effect on (i) the financial
position, property, business, assets or results of operations of Seller and
its
Subsidiaries, taken as a whole, or (ii) the ability of Seller to perform
its obligations under this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement, provided,
that “Seller
Material Adverse Effect” shall not be deemed to include the effects of
(A) changes in banking and other Laws of general applicability or
interpretations thereof by Governmental Authorities, (B) changes in GAAP or
regulatory accounting principles generally applicable to banks and their holding
companies, or (C) actions and omissions of Seller (or any of its
Subsidiaries) taken with the prior written Consent of Buyer in contemplation
of
the transactions contemplated hereby, or (D) the direct effects negotiating,
entering into and compliance with this Agreement on the operating performance
of
Seller, including specifically Seller’s costs and expenses associated therewith,
including, but not limited to, accounting, financial advisor, and legal
fees.
“Seller
Pension Plan”
shall
have the meaning as set forth in Section 4.15(a) of the Agreement.
“Seller
Options”
shall
have the meaning as set forth in Section 3.4(a) of the Agreement.
“Seller
Subsidiaries”
means
the Subsidiaries, if any, of Seller, as of the date of this Agreement, Seller
has only one Subsidiary, The Bank of Camden.
“Shareholders’
Meeting”
means
the meeting of Seller’s shareholders to be held pursuant to Section 7.1(a),
including any adjournment or adjournments thereof.
“Subsequent
Determination”
shall
have the meaning as set forth in Section 7.1(b) of the Agreement.
“Subsidiaries”
means
all those corporations, banks associations, or other entities of which the
entity in question either (i) owns or controls 50% or more of the
outstanding equity securities either directly or through an unbroken chain
of
entities as to each of which 50% or more of the outstanding equity securities
is
owned directly or indirectly by its parent (provided,
there
shall not be included any such entity the equity securities of which
are
owned
or controlled in a fiduciary capacity), (ii) in the case of partnerships,
serves as a general partner, (iii) in the case of a limited liability
company, serves as a managing member, or (iv) otherwise has the ability to
elect a majority of the directors, trustees or managing members
thereof.
“Superior
Proposal” means
any
Acquisition Proposal (on its most recently amended or modified terms, if amended
or modified) (i) involving the acquisition of at least a majority of the
outstanding equity interest in, or all or substantially all of the assets and
liabilities of, the Seller Entities and (ii) with respect to which the Board
of
Directors of Seller (A) determines in good faith that such Acquisition
Proposal, if accepted, is reasonably likely to be consummated on a timely basis,
taking into account all legal, financial, regulatory and other aspects of the
Acquisition Proposal and the Person or Group making the Acquisition Proposal,
and (B) determines in its good faith judgment (based on, among other
things, the advice of its financial advisor) to be more favorable to Seller’s
shareholders than the Merger taking into account all relevant factors (including
whether, in the good faith judgment of the Board of Directors of Seller, after
obtaining the advice of Seller’s Financial Advisor, the Person or Group making
such Acquisition Proposal is reasonably able to finance the transaction and
close it timely, and any proposed changes to this Agreement that may be proposed
by Buyer in response to such Acquisition Proposal).
“Support
Agreements”
shall
have the meaning as set forth in Section 8.2(f) of the Agreement.
“Surviving
Corporation”
means
Buyer as the surviving corporation resulting from the Merger.
“Takeover
Laws”
shall
have the meaning as set forth in Section 4.23 of the Agreement.
“Tax”
or
“Taxes”
means
all taxes, charges, fees, levies, imposts, duties, or assessments, including
income, gross receipts, excise, employment, sales, use, transfer, recording
license, payroll, franchise, severance, documentary, stamp, occupation, windfall
profits, environmental, federal highway use, commercial rent, customs duties,
capital stock, paid-up capital, profits, withholding, Social Security, single
business and unemployment, disability, real property, personal property,
registration, ad
valorem,
value
added, alternative or add-on minimum, estimated, or other taxes, fees,
assessments or
charges
of any kind whatsoever, imposed or required to be withheld by any Governmental
Authority (domestic or foreign), including any interest, penalties, and
additions imposed thereon or with respect thereto.
“Tax
Return”
means
any report, return, information return, or other information required to be
supplied to a Governmental Authority in connection with Taxes, including any
return of an affiliated or combined or unitary group that includes a Party
or
its Subsidiaries.
“Taxing
Authority”
means
the Internal Revenue Service and any other Governmental Authority responsible
for the administration of any Tax.
“Termination
Fee”
shall
have the meaning as set forth in Section 9.3(a)(ii) of the
Agreement.
“WARN
Act” shall
have the meaning as set forth in Section 4.14(c) of the Agreement.
(b) Any
singular term in this Agreement shall be deemed to include the plural, and
any
plural term the singular. Whenever the words “include,” “includes” or
“including” are used in this Agreement, they shall be deemed followed by the
words “without limitation”, and such terms shall not be limited by enumeration
or example.
Each
of
the Parties shall bear and pay all direct costs and expenses incurred by it
or
on its behalf in connection with the transactions contemplated hereunder,
including filing, registration and application fees, printing fees, and fees
and
expenses of its own financial or other consultants, investment bankers,
accountants, and counsel, and which in the case of Seller, shall be paid at
Closing and prior to the Effective Time.
Except
for Seller Financial Advisor as to Seller, each of the Parties represents and
warrants that neither it nor any of its officers, directors, employees, or
Affiliates has employed any broker or finder or incurred any Liability for
any
financial advisory fees, investment bankers’ fees, brokerage fees, commissions,
or finders’ fees in connection with this Agreement or the transactions
contemplated hereby. In the event of a claim by any broker or finder based
upon
such broker’s representing or being retained by or allegedly representing or
being retained by Seller or by Buyer, each of Seller and Buyer, as the case
may
be, agrees to indemnify and hold the other Party harmless from any Liability
in
respect of any such claim. Seller has provided a copy of Seller Financial
Advisor’s engagement letter and expected fee for its services as Section 10.3 of
the Seller Disclosure Memorandum and shall pay all amounts due thereunder at
Closing and prior to the Effective Time.
Except
as
otherwise expressly provided herein, this Agreement (including the documents
and
instruments referred to herein) constitutes the entire agreement between the
Parties with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereto, written or oral.
Nothing in this Agreement expressed or implied, is intended to confer upon
any
Person, other than the Parties or their respective successors, any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
other than as provided in Sections 7.9 and 7.12.
To
the
extent permitted by Law, and subject to Section 1.4, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of each of the Parties, whether before or after shareholder approval of this
Agreement has been obtained; provided,
that
after
any such approval by the holders of Seller Common Stock, there shall be made
no
amendment that reduces or modifies in any respect the consideration to be
received by holders of Seller Common Stock.
(a) Prior
to
or at the Effective Time, Buyer, acting through its board of directors, chief
executive officer, or other authorized officer, shall have the right to waive
any Default in the performance of any term of this Agreement by Seller, to
waive
or extend the time for the compliance or fulfillment by Seller of any and all
of
its obligations under this Agreement, and to
waive
any or all of the conditions precedent to the obligations of Buyer under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of Buyer.
(b) Prior
to
or at the Effective Time, Seller, acting through its board of directors, chief
executive officer, or other authorized officer, shall have the right to waive
any Default in the performance of any term of this Agreement by Buyer, to waive
or extend the time for the compliance or fulfillment by Buyer of
any
and all of its obligations under this Agreement, and to waive any or all of
the
conditions precedent to the obligations of Seller under this Agreement, except
any condition which, if not satisfied, would result in the violation of any
Law.
No such waiver shall be effective unless in writing signed by a duly authorized
officer of Seller.
(c) The
failure of any Party at any time or times to require performance of any
provision hereof shall in no manner affect the right of such Party at a later
time to enforce the same or any other provision of this Agreement. No waiver
of
any condition or of the breach of any term contained in this Agreement in one
or
more instances shall be deemed to be or construed as a further or continuing
waiver of such condition or breach or a waiver of any other condition or of
the
breach of any other term of this Agreement.
Except
as
expressly contemplated hereby, neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any Party hereto
(whether by operation of Law, including by merger or consolidation, or
otherwise) without the prior written consent of the other Party. Subject to
the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of
and be enforceable by the Parties and their respective successors and
assigns.
All
notices or other communications which are required or permitted hereunder shall
be in writing and sufficient if delivered by hand, by facsimile transmission,
by
registered or certified
mail,
postage pre-paid, or by courier or overnight carrier, to the persons at the
addresses set forth below (or at such other address as may be provided
hereunder), and shall be deemed to have been delivered as of the date so
delivered or refused:
|
Buyer:
|
First
Community Corporation
|
|
|
5455
Sunset Blvd.
|
|
|
Lexington,
SC 29072
|
|
|
Facsimile
Number: (803) 951-0501
|
|
|
Attention:
Michael C. Crapps
|
|
|
|
|
Copy
to Counsel:
|
Nelson
Mullins Riley & Scarborough LLP
|
|
|
Poinsett
Plaza, Suite 900
|
|
|
104
South Main Street
|
|
|
Greenville,
SC 29601
|
|
|
Facsimile
Number: (864) 250-2356
|
|
|
Attention:
Neil E. Grayson
|
|
Seller:
|
DeKalb
Bankshares, Inc.
|
|
|
631
West DeKalb Street
|
|
|
Camden,
SC 29020
|
|
|
Facsimile
Number: (803)
|
|
|
Attention:
William C. Bochette, III
|
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Copy
to Counsel:
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Haynsworth
Sinkler Boyd, P.A.
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1201
Main Street, 22nd
Floor
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Columbia,
South Carolina 29201
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Facsimile
Number: (803) 765-1243
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Attention:
George S. King, Jr.
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Regardless
of any conflict of law or choice of law principles that might otherwise apply,
the Parties agree that this Agreement shall be governed by and construed in
all
respects in accordance with the laws of the State of South Carolina.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed to be an original, but all of which together shall constitute one and
the
same instrument.
The
captions contained in this Agreement are for reference purposes only and are
not
part of this Agreement. Unless otherwise indicated, all references to particular
Articles or Sections shall mean and refer to the referenced Articles and
Sections of this Agreement.
Neither
this Agreement nor any uncertainty or ambiguity herein shall be construed or
resolved against any Party, whether under any rule of construction or otherwise.
No Party to
this
Agreement shall be considered the draftsman. The Parties acknowledge and agree
that this Agreement has been reviewed, negotiated, and accepted by all Parties
and their attorneys and shall be construed and interpreted according to the
ordinary meaning of the words used so as fairly to accomplish the purposes
and
intentions of all Parties hereto.
The
Parties hereto agree that irreparable damage would occur in the event that
any
of the provisions of this Agreement was not performed in accordance with its
specific terms or was otherwise breached. It is accordingly agreed that the
Parties shall be entitled to an injunction or injunctions to prevent breaches
of
this Agreement and to enforce specifically the terms and provisions hereof
in
any court of the United States or any state having jurisdiction, this being
in
addition to any other remedy to which they are entitled at law or in
equity.
Any
term
or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
[signatures
appear on next page]
IN
WITNESS WHEREOF,
each of
the Parties has caused this Agreement to be executed on its behalf by its duly
authorized officers as of the day and year first above written.
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FIRST
COMMUNITY CORPORATION
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(BUYER)
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By:
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/s/
Michael C. Crapps
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Michael
C. Crapps
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President
and Chief Executive Officer
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DEKALB
BANKSHARES, INC.
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(SELLER)
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By:
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/s/
William C. Bochette, III
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William
C. Bochette, III
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President
and Chief Executive Officer
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CHAPTER
13.
DISSENTERS'
RIGHTS
ARTICLE
1.
RIGHT
TO
DISSENT AND OBTAIN PAYMENT FOR SHARES
In
this
chapter:
(1)
"Corporation" means the issuer of the shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
(2)
"Dissenter" means a shareholder who is entitled to dissent from corporate action
under Section 33-13-102 and who exercises that right when and in the manner
required by Sections 33-13-200 through 33-13-280.
(3)
"Fair
value", with respect to a dissenter's shares, means the value of the shares
immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation
of
the corporate action to which the dissenter objects, excluding any appreciation
or depreciation in anticipation of the corporate action unless exclusion would
be inequitable. The value of the shares is to be determined by techniques that
are accepted generally in the financial community.
(4)
"Interest" means interest from the effective date of the corporate action until
the date of payment, at the average rate currently paid by the corporation
on
its principal bank loans or, if none, at a rate that is fair and equitable
under
all the circumstances.
(5)
"Record shareholder" means the person in whose name shares are registered in
the
records of a corporation or the beneficial owner of shares to the extent of
the
rights granted by a nominee certificate on file with a corporation.
(6)
"Beneficial shareholder" means the person who is a beneficial owner of shares
held by a nominee as the record shareholder.
(7)
"Shareholder" means the record shareholder or the beneficial shareholder.
(A)
A
shareholder is entitled to dissent from, and obtain payment of the fair value
of, his shares in the event of any of the following corporate actions:
(1)
consummation of a plan of merger to which the corporation is a party (i) if
shareholder approval is required for the merger by Section 33-11-103 or the
articles of incorporation and the shareholder is entitled to vote on the merger
or (ii) if the corporation is a subsidiary that is merged with its parent under
Section 33-11-104 or 33-11-108 or if the corporation is a parent that is merged
with its subsidiary under Section 33-11-108;
(2)
consummation of a plan of share exchange to which the corporation is a party
as
the corporation whose shares are to be acquired, if the shareholder is entitled
to vote on the plan;
(3)
consummation of a sale or exchange of all, or substantially all, of the property
of the corporation other than in the usual and regular course of business,
if
the shareholder is entitled to vote on the sale or
exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all
of
the net proceeds of the sale must be distributed to the shareholders within
one
year after the date of sale;
(4)
an
amendment of the articles of incorporation that materially and adversely affects
rights in respect of a dissenter's shares because it:
(i)
alters or abolishes a preferential right of the shares;
(ii)
creates, alters, or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of the
shares;
(iii)
alters or abolishes a preemptive right of the holder of the shares to acquire
shares or other securities;
(iv)
excludes or limits the right of the shares to vote on any matter, or to cumulate
votes, other than a limitation by dilution through issuance of shares or other
securities with similar voting rights; or
(v)
reduces the number of shares owned by the shareholder to a fraction of a share
if the fractional share so created is to be acquired for cash under Section
33-6-104;
(5)
any
corporate action to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their shares;
(6)
the
conversion of a corporation into a limited liability company pursuant to Section
33-11-111 or conversion of a corporation into either a general partnership
or
limited partnership pursuant to Section 33-11-113;
(7)
the
consummation of a plan of conversion to a limited liability company pursuant
to
Section 33-11-111 or to a partnership or limited partnership pursuant to Section
33-11-113.
(B)
Notwithstanding subsection (A), no dissenters' rights under this section are
available for shares of any class or series of shares which, at the record
date
fixed to determine shareholders entitled to receive notice of a vote at the
meeting of shareholders to act upon the agreement of merger or exchange, were
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.
(a)
A
record shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing
of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares to which he dissents and his other shares were registered
in
the names of different shareholders.
(b)
A
beneficial shareholder may assert dissenters' rights as to shares held on his
behalf only if he dissents with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote. A
beneficial shareholder asserting dissenters' rights to shares held on his behalf
shall notify the corporation in writing of the name and address of the record
shareholder of the shares, if known to him.
ARTICLE
2.
PROCEDURE
FOR EXERCISE OF DISSENTERS' RIGHTS
(a)
If
proposed corporate action creating dissenters' rights under Section 33-13-102
is
submitted to a vote at a shareholders' meeting, the meeting notice must state
that shareholders are or may be entitled to assert dissenters' rights under
this
chapter and be accompanied by a copy of this chapter.
(b)
If
corporate action creating dissenters' rights under Section 33-13-102 is taken
without a vote of shareholders, the corporation shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken
and
send them the dissenters' notice described in Section 33-13-220.
(a)
If
proposed corporate action creating dissenters' rights under Section 33-13-102
is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights (1) must give to the corporation before the vote
is
taken written notice of his intent to demand payment for his shares if the
proposed action is effectuated and (2) must not vote his shares in favor of
the
proposed action. A vote in favor of the proposed action cast by the holder
of a
proxy solicited by the corporation shall not disqualify a shareholder from
demanding payment for his shares under this chapter.
(b)
A
shareholder who does not satisfy the requirements of subsection (a) is not
entitled to payment for his shares under this chapter.
(a)
If
proposed corporate action creating dissenters' rights under Section 33-13-102
is
authorized at a shareholders' meeting, the corporation shall deliver a written
dissenters' notice to all shareholders who satisfied the requirements of Section
33-13-210(a).
(b)
The
dissenters' notice must be delivered no later than ten days after the corporate
action was taken and must:
(1)
state
where the payment demand must be sent and where certificates for certificated
shares must be deposited;
(2)
inform holders of uncertificated shares to what extent transfer of the shares
is
to be restricted after the payment demand is received;
(3)
supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he or, if he is a nominee asserting dissenters' rights
on
behalf of a beneficial shareholder, the beneficial shareholder acquired
beneficial ownership of the shares before that date;
(4)
set a
date by which the corporation must receive the payment demand, which may not
be
fewer than thirty nor more than sixty days after the date the subsection (a)
notice is delivered and set a date by which certificates for certificated shares
must be deposited, which may not be earlier than twenty days after the demand
date; and
(5)
be
accompanied by a copy of this chapter.
(a)
A
shareholder sent a dissenters' notice described in Section 33-13-220 must demand
payment, certify whether he (or the beneficial shareholder on whose behalf
he is
asserting dissenters' rights) acquired beneficial ownership of the shares before
the date set forth in the dissenters' notice pursuant to Section
33-13-220(b)(3), and deposit his certificates in accordance with the terms
of
the notice.
(b)
The
shareholder who demands payment and deposits his share certificates under
subsection (a) retains all other rights of a shareholder until these rights
are
canceled or modified by the taking of the proposed corporate action.
(c)
A
shareholder who does not comply substantially with the requirements that he
demand payment and deposit his share certificates where required, each by the
date set in the dissenters' notice, is not entitled to payment for his shares
under this chapter.
(a)
The
corporation may restrict the transfer of uncertificated shares from the date
the
demand for payment for them is received until the proposed corporate action
is
taken or the restrictions are released under Section 33-13-260.
(b)
The
person for whom dissenters' rights are asserted as to uncertificated shares
retains all other rights of a shareholder until these rights are canceled or
modified by the taking of the proposed corporate action.
(a)
Except as provided in Section 33-13-270, as soon as the proposed corporate
action is taken, or upon receipt of a payment demand, the corporation shall
pay
each dissenter who substantially complied with Section 33-13-230 the amount
the
corporation estimates to be the fair value of his shares, plus accrued interest.
(b)
The
payment must be accompanied by:
(1)
the
corporation's balance sheet as of the end of a fiscal year ending not more
than
sixteen months before the date of payment, an income statement for that year,
a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
(2)
a
statement of the corporation's estimate of the fair value of the shares and
an
explanation of how the fair value was calculated;
(3)
an
explanation of how the interest was calculated;
(4)
a
statement of the dissenter's right to demand additional payment under Section
33-13-280; and
(5)
a
copy of this chapter.
(a)
If
the corporation does not take the proposed action within sixty days after the
date set for demanding payment and depositing share certificates, the
corporation, within the same sixty-day period, shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(b)
If,
after returning deposited certificates and releasing transfer restrictions,
the
corporation takes the proposed action, it must send a new dissenters' notice
under Section 33-13-220 and repeat the payment demand procedure.
(a)
A
corporation may elect to withhold payment required by section 33-13-250 from
a
dissenter as to any shares of which he (or the beneficial owner on whose behalf
he is asserting dissenters' rights) was not the beneficial owner on the date
set
forth in the dissenters' notice as the date of the first announcement to news
media or to shareholders of the terms of the proposed corporate action, unless
the beneficial ownership of the shares devolved upon him by operation of law
from a person who was the beneficial owner on the date of the first
announcement.
(b)
To
the extent the corporation elects to withhold payment under subsection (a),
after taking the proposed corporate action, it shall estimate the fair value
of
the shares, plus accrued interest, and shall pay this amount to each dissenter
who agrees to accept it in full satisfaction of his demand. The corporation
shall send with its offer a statement of its estimate of the fair value of
the
shares, an explanation of how the fair value and interest were calculated,
and a
statement of the dissenter's right to demand additional payment under Section
33-13-280.
(a)
A
dissenter may notify the corporation in writing of his own estimate of the
fair
value of his shares and amount of interest due and demand payment of his
estimate (less any payment under Section 33-13-250) or reject the corporation's
offer under Section 33-13-270 and demand payment of the fair value of his shares
and interest due, if the:
(1)
dissenter believes that the amount paid under Section 33-13-250 or offered
under
Section 33-13-270 is less than the fair value of his shares or that the interest
due is calculated incorrectly;
(2)
corporation fails to make payment under Section 33-13-250 or to offer payment
under Section 33-13-270 within sixty days after the date set for demanding
payment; or
(3)
corporation, having failed to take the proposed action, does not return the
deposited certificates or release the transfer restrictions imposed on
uncertificated shares within sixty days after the date set for demanding
payment.
(b)
A
dissenter waives his right to demand additional payment under this section
unless he notifies the corporation of his demand in writing under subsection
(a)
within thirty days after the corporation made or offered payment for his shares.
ARTICLE
3.
JUDICIAL
APPRAISAL OF SHARES
(a)
If a
demand for additional payment under Section 33-13-280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
demand for additional payment and petition the court to determine the fair
value
of the shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(b)
The
corporation shall commence the proceeding in the circuit court of the county
where the corporation's principal office (or, if none in this State, its
registered office) is located. If the corporation is a foreign corporation
without a registered office in this State, it shall commence the proceeding
in
the county in this State where the principal office (or, if none in this State,
the registered office) of the domestic corporation merged with or whose shares
were acquired by the foreign corporation was located.
(c)
The
corporation shall make all dissenters (whether or not residents of this State)
whose demands remain unsettled parties to the proceeding as in an action against
their shares and all parties must be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by publication,
as
provided by law.
(d)
The
jurisdiction of the court in which the proceeding is commenced under subsection
(b) is plenary and exclusive. The court may appoint persons as appraisers to
receive evidence and recommend decisions on the question of fair value. The
appraisers have the powers described in the order appointing them or in any
amendment to it. The dissenters are entitled to the same discovery rights as
parties in other civil proceedings.
(e)
Each
dissenter made a party to the proceeding is entitled to judgment for the amount,
if any, by which the court finds the fair value of his shares, plus interest,
exceeds the amount paid by the corporation.
(a)
The
court in an appraisal proceeding commenced under Section 33-13-300 shall
determine all costs of the proceeding, including the reasonable compensation
and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess costs against all
or
some of the dissenters, in amounts the court finds equitable, to the extent
the
court finds the dissenters acted arbitrarily, vexatiously, or not in good faith
in demanding payment under Section 33-13-280.
(b)
The
court also may assess the fees and expenses of counsel and experts for the
respective parties, in amounts the court finds equitable:
(1)
against the corporation and in favor of any or all dissenters if the court
finds
the corporation did not comply substantially with the requirements of Sections
33-13-200 through 33-13-280; or
(2)
against either the corporation or a dissenter, in favor of any other party,
if
the court finds that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously, or not in good faith with respect to the rights
provided by this chapter.
(c)
If
the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court
may
award to these counsel reasonable fees to be paid out of the amounts awarded
the
dissenters who were benefited.
(d)
In a
proceeding commenced by dissenters to enforce the liability under Section
33-13-300(a) of a corporation that has failed to commence an appraisal
proceeding within the sixty-day period, the court shall assess the costs of
the
proceeding and the fees and expenses of dissenters' counsel against the
corporation and in favor of the dissenters.
Board
of
Directors
Dekalb
Bankshares, Inc.
631
West
Dekalb Street
Camden,
SC 29020
Members
of the Board:
Dekalb
Bankshares, Inc. entered into an Agreement and Plan of Merger (“the Agreement”)
with First Community Corporation as of January 19, 2006, whereby Dekalb
Bankshares, Inc. will merge with and into First Community Corporation (the
“Merger”).
You
have
requested our opinion with respect to the fairness, from a financial point
of
view, to the holders of the common stock (the “Stockholders”) of Dekalb
Bankshares, Inc. of the consideration to be received in the Merger as defined
in
the Agreement (the “Merger Consideration”). Our opinion is as of the date
hereof.
In
conducting our analysis and arriving at our opinion as expressed herein,
we have
considered, reviewed and analyzed financial and other information and materials
that we have deemed appropriate under the circumstances, and among other
things:
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(i)
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Reviewed
the Merger Agreement and certain related documents;
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(ii)
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Reviewed
the historical and current financial position and results of the
operations of Dekalb Bankshares, Inc. and First Community Corporation;
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(iii)
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Reviewed
certain publicly available information concerning First Community
Corporation including Annual Reports on Form 10-K for each of the
years in
the three year period ended December 31, 2004 and Quarterly Reports
on
Form 10-Q for the periods ending March 31, 2005, June 30, 2005,
and
September 30, 2005;
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(iv)
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Reviewed
certain publicly available information concerning Dekalb Bankshares,
Inc.
including Annual Reports on Form 10-K for each of the years in
the three
year period ended December 31, 2004 and Quarterly Reports on Form
10-Q for
the periods ending March 31, 2005, June 30, 2005, and September
30, 2005;
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(v)
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Reviewed
certain available financial forecasts concerning the business and
operations of Dekalb Bankshares, Inc. that were prepared by management
Dekalb Bankshares, Inc.;
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(vi)
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Participated
in discussions with certain officers and employees of Dekalb Bankshares,
Inc. and First Community Corporation to discuss the past and current
business operations, financial condition and prospects of Dekalb
Bankshares, Inc. and First Community Corporation, as well as matters
we
believed relevant to our inquiry;
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(vii)
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Reviewed
certain publicly available operating and financial information
with
respect to other companies that we believe to be comparable in
certain
respects to Dekalb Bankshares, Inc. and First Community
Corporation;
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(viii)
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Reviewed
the current and historical relationships between the trading levels
of
First Community Corporation’s common stock and other companies that we
believe to be comparable in certain respects to First Community
Corporation;
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(ix)
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Reviewed
the nature and terms of certain other acquisition transactions
that we
believe to be relevant; and
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(x)
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Performed
such other reviews and analyses we have deemed
appropriate.
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In
our
review and analysis, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information provided to us,
or
that is publicly available, and have not attempted independently to verify
nor
assumed responsibility for verifying any such information. With respect to
any
financial projections, we have assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments
of
Dekalb Bankshares, Inc. and we express no opinion with respect to such forecasts
or the assumptions on which they are based. We have not made or obtained
or
assumed any responsibility for making or obtaining any independent evaluations
or appraisals of any of the assets, including loans, properties and facilities,
or liabilities of Dekalb Bankshares, Inc. or First Community
Corporation.
Our
opinion is based upon conditions as they exist and can be evaluated on the
date
hereof. Our opinion expressed below does not imply any conclusion as to the
likely trading range for any common stock following the consummation of the
Merger, which may vary depending upon, among other factors, changes in interest
rates, dividend rates, market conditions, general economic conditions and
factors that generally influence the price of securities. Our opinion does
not
address Dekalb Bankshares, Inc.’s underlying business decision to effect the
Merger. Our opinion is directed only to the fairness, from a financial point
of
view, of the Merger Consideration and does not constitute a recommendation
concerning how holders of Dekalb Bankshares, Inc.’s common stock should vote
with respect to the Agreement. The Orr Group, LLC has earned a fee of $24,470
to
date and will be paid an additional fee of $73,411 at the time the Merger
is
consummated. The payment to The Orr Group, LLC includes payment for services
rendered in preparation and delivery of the fairness opinion.
In
rendering our opinion we have assumed that in the course of obtaining the
necessary regulatory approvals for the Merger, no restrictions will be imposed
that would have a material adverse affect on the contemplated benefits of
the
Merger to First Community Corporation following the Merger.
Subject
to the foregoing, it is our opinion that, as of the date hereof, the Merger
Consideration is fair to the Stockholders from a financial point of
view.
Very
truly yours,
/s/
The
Orr Group, LLC
The
Orr
Group, LLC
C-2