| FIRST COMMUNITY CORP /SC/ Item 1A Risk Factors We cannot guarantee the consummation of our contemplated merger with DeKalb Bankshares, and if we do not complete the merger our results of operations and financial condition will be adversely affected |
| We will not be able to consummate the merger without the approval of certain state and federal regulatory agencies and the shareholders of DeKalb |
| Accordingly, we can give no assurances that those approvals will be obtained or that the acquisition will be completed |
| If we do not consummate the merger, our results of operations and financial condition will be adversely affected due to the costs we have incurred and time we have spent in preparing for the merger |
| Our recent operating results may not be indicative of our future operating results |
| We may not be able to sustain our historical rate of growth and may not even be able to grow our business at all |
| Because of our relatively short operating history, it will be difficult for us to generate similar earnings growth as we continue to expand, and consequently our historical results of operations will not necessarily be indicative of our future operations |
| Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence |
| If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses |
| Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business |
| Making loans and other extensions of credit is an essential element of our business |
| Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid |
| The risk of nonpayment is affected by a number of factors, including: • the duration of the credit; • credit risks of a particular customer; • changes in economic and industry conditions; and • in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral |
| We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio |
| We periodically determine the amount of the allowance based on consideration of several factors, including: • an ongoing review of the quality, mix, and size of our overall loan portfolio; • our historical loan loss experience; • evaluation of economic conditions; • regular reviews of loan delinquencies and loan portfolio quality; and • the amount and quality of collateral, including guarantees, securing the loans |
| There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required |
| Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital |
| Lack of seasoning of our loan portfolio may increase the risk of credit defaults in the future |
| Due to the rapid growth of our bank over the past several years, a substantial portion of the loans in our loan portfolio and of our lending relationships are of relatively recent origin |
| In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning |
| ” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio |
| Because our loan portfolio has grown substantially, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels |
| If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition |
| [41]Back to Table of Contents 12 _________________________________________________________________ An economic downturn, especially one affecting the Lexington, Richland, and Newberry Counties and the surrounding areas, could reduce our customer base, our level of deposits, and demand for financial products such as loans |
| Our success significantly depends upon the growth in population, income levels, deposits, and housing starts in our market of Lexington, Richland, and Newberry Counties and the surrounding area |
| If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed |
| An economic downturn would likely contribute to the deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would hurt our business |
| If an economic downturn occurs in the economy as a whole, or in Lexington, Richland, or Newberry Counties and the surrounding area, borrowers may be less likely to repay their loans as scheduled |
| Moreover, the value of real estate or other collateral that may secure our loans could be adversely affected |
| Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies |
| An economic downturn could, therefore, result in losses that materially and adversely affect our business |
| Changes in prevailing interest rates may reduce our profitability |
| Our results of operations depend in large part upon the level of our net interest income, which is the difference between interest income from interest-earning assets, such as loans and mortgage-backed securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings |
| Depending on the terms and maturities of our assets and liabilities, a significant change in interest rates could have a material adverse effect on our profitability |
| Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions |
| While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations could suffer |
| After operating in a historically low interest rate environment, the Federal Reserve began raising short-term interest rates in the second quarter of 2004 |
| At December 31, 2005, we anticipate that our balance sheet is currently structured so that net income is not materially impacted in a rising interest rate environment |
| However, no assurance can be given that the Federal Reserve will actually continue to raise interest rates or that the results we anticipate will actually occur |
| We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects |
| Michael C Crapps, our president and chief executive officer, has extensive and long-standing ties within our primary market area and substantial experience with our operations, and he has contributed significantly to our growth |
| Crapps, he would be difficult to replace and our business and development could be materially and adversely affected |
| Our success also depends, in part, on our continued ability to attract and retain experienced loan originators, as well as other management personnel |
| Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel |
| Our failure to compete for these personnel, or the loss of the services of several of such key personnel, could adversely affect our growth strategy and seriously harm our business, results of operations, and financial condition |
| We are subject to extensive regulation that could limit or restrict our activities |
| We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies |
| Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices |
| We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth |
| The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability |
| Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably |
| The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission that are now applicable to us, have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices |
| To comply with the Sarbanes-Oxley Act, we have previously hired [42]Back to Table of Contents 13 _________________________________________________________________ outside consultant to assist with our internal audit and internal control functions |
| We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act |
| Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed |
| We are required by regulatory authorities to maintain adequate levels of capital to support our operations |
| To support our continued growth, we may need to raise additional capital |
| Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control |
| Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us |
| If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired |
| In addition, if we decide to raise additional equity capital, your interest could be diluted |
| We face strong competition for clients, which could prevent us from obtaining clients and may cause us to pay higher interest rates to attract clients |
| The banking business is highly competitive, and we experience competition in our market from many other financial institutions |
| We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national, and international financial institutions that operate offices in our primary market areas and elsewhere |
| We compete with these institutions both in attracting deposits and in making loans |
| In addition, we have to attract our client base from other existing financial institutions and from new residents |
| Many of our competitors are well-established, larger financial institutions |
| These institutions offer some services, such as extensive and established branch networks, that we do not provide |
| There is a risk that we will not be able to compete successfully with other financial institutions in our market, and that we may have to pay higher interest rates to attract deposits, resulting in reduced profitability |
| In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us |
| We will face risks with respect to expansion through acquisitions or mergers |
| Our acquisition of DeKalb Bankshares and The Bank of Camden is currently pending |
| If the merger is completed, we face a risk that the expected cost savings and any revenue synergies from the merger may not be fully realized within the expected timeframes, or that disruption from the merger may make it more difficult to maintain relationships with our or DeKalb’s customers, employees, or suppliers |
| In addition, from time to time we may seek to acquire other financial institutions or parts of those institutions |
| We may also expand into new markets or lines of business or offer new products or services |
| These activities would involve a number of risks, including: • the potential inaccuracy of the estimates and judgments used to evaluate credit, operations, management, and market risks with respect to a target institution; • the time and costs of evaluating new markets, hiring or retaining experienced local management, and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; • the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse effects on our results of operations; and • the risk of loss of key employees and customers |