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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year ended December 31, 2004 Commission File Number 0-25972 FIRST COMMUNITY CORPORATION
  Tennessee
    
    62-1562541(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)809 West Main Street, Rogersville, Tennessee
    
    37857(Address of principal executive offices)
    
    (Zip Code)
 (423) 272-5800
(Issuers telephone number, including area code) Securities registered under Section 12(g) of the Exchange Act:Common Stock, no par value
Common Stock Purchase Rights
(Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES þ NO o Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB þ The issuers revenues for the fiscal year ending December 31, 2004: $12,585,000. The aggregate market value of the issuers voting and non-voting common stock held by
non-affiliates, computed by reference to the price at which the stock was sold as of March 4, 2005,
is $27,435,620 for 1,371,781 shares, at an estimated $20 per share. Shares of the issuers common stock outstanding as of March 30, 2005: 1,913,452 Transitional Small Business Disclosure Format (check one): YES o NO þ




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DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive proxy statement, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31, 2004, are
incorporated by reference into Part III of this annual report on Form 10-KSB.




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FIRST COMMUNITY CORPORATION
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 INDEX ITEM 1. Description of Business
    
    
    2Overview
    
    
    2Personnel
    
    
    3Competition
    
    
    3Lending Services and Loan Review
    
    
    3Investment Policy
    
    
    4Monetary Policies
    
    
    4Supervision and Regulation
    
    
    4Overview
    
    
    4Organization
    
    
    4Capital
    
    
    5Prompt Corrective Action
    
    
    5Payment of Dividends
    
    
    6The Companys Support of the Bank
    
    
    6Restrictions on Transactions with Affiliates and Insiders
    
    
    6Acquisition and Expansion
    
    
    7FDIC Insurance
    
    
    7General
Effect of Federal Monetary Policies
    
    
    7Effect of Specific Legislation
    
    
    7Standards for Safety and Soundness
    
    
    7Community Reinvestment Act
    
    
    8Consumer Protection Provisions
    
    
    8Additional Significant Matters
    
    
    8Gramm Leach Bliley Act
    
    
    8USA Patriot Act of 2001
    
    
    9Sarbanes Oxley Act of 2002
    
    
    9Other Consumer Laws and Regulations
    
    
    10Other Pending and Proposed Legislation
    
    
    11ITEM 2. Description of Property
    
    
    11Overview
    
    
    11Owned Properties
    
    
    11Main Office
    
    
    11Operations Center, Branch Sites and Undeveloped Property
    
    
    11Leased Property
    
    
    12Real
Estate Investments
    
    
    12ITEM 3. Legal Proceedings
    
    
    12ITEM 4. Submission of Matters to a Vote of Shareholders
    
    
    12ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    12Trading History
    
    
    12Equity Holders
    
    
    13Payment of Dividends
    
    
    13Securities Authorized for Issuance under Equity Compensation Plans
    
    
    13ITEM 6. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Overview
    
    
    14Financial Condition
    
    
    14Liquidity
And Interest Rate Risk
    
    
    16Results Of Operations
    
    
    18Comparison of Years Ended December 31, 2004, and 2003
    
    
    18Net Interest Income
    
    
    18Provision for Loan Losses
    
    
    18Noninterest Income
    
    
    18
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Noninterest Expenses
    
    
    19Provision for Income Taxes.
    
    
    19ITEM 7. Financial Statements
    
    
    27ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    28ITEM 8A. Controls and Procedures
    
    
    28ITEM 8B. Other Information
    
    
    28ITEM 9. Directors and Executive Officers of the Registrant
    
    
    28ITEM 10. Executive Compensation
    
    
    28ITEM 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    28ITEM 12. Certain Relationships and Related Transactions
    
    
    28ITEM 13. Exhibits and Reports on Form 8-K
    
    
    29ITEM 14. Principal Accountant Fees and Services
    
    
    29SIGNATURES
    
    
    30EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2EX-21 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF CROWE CHIZEK AND COMPANY LLCEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
    ii




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RISKS, UNCERTAINTIES AND FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-KSB of First Community Corporation, a Tennessee corporation (the
Company), contains or incorporates by reference certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are
intended to be covered by the safe harbors created thereby. Those statements include, but may
not be limited to, the discussions of the Companys expectations concerning its future
profitability, operating performance, growth strategy and its assumptions regarding other matters.
Also, when any of the words believes, expects, anticipates, intends, estimates, plans,
or similar terms or expressions, are used in this Annual Report on Form 10-KSB, forward-looking
statements are being made. You should be aware that, while the Company believes the expectations reflected in those
forward-looking statements are reasonable, they are inherently subject to risks and uncertainties
that could cause the Companys future results and stockholder values to differ materially from the
Companys expectations. In addition to the factors disclosed in Managements Discussion and
Analysis of Financial Condition and Results of Operation, these risks and uncertainties include
the following:  
    Our ability to manage growth depends on our ability to attract and retain
qualified personnel, monitor our operations, maintain increased earnings levels,
control costs, and maintain positive customer relations. If we fail to achieve
these objectives efficiently, we may experience interruptions and dislocation in
our business.
    Loss of our senior executive officers or other key employees could impair our
relationship with our customers and adversely affect our business.
    Although management believes that its allowance for loan losses is adequate,
there is no assurance that the allowance will prove sufficient to cover future loan
losses, and our estimated allowance may change from time to time based on our
financial projections.
    Our earnings are subject to interest rate risk, especially if rates fall, which
could reduce our margins or reduce the fair value of financial instruments.
    All of our lending involves underwriting risks, especially in a competitive
lending market, and our business is subject to the spending, borrowing, and savings
habits of both our commercial and consumer customers.
    Competition with other banking institutions could adversely affect our
profitability.
    Our business is dependent on technology, and an inability to invest in
technological improvements may adversely affect our results of operations and
financial condition.
    We are subject to the effects of changes in accounting policies and practices,
as may be adopted by the bank regulatory agencies and other regulatory and
accounting bodies, which could effect the reporting of our financial results.
    While our management does not expect to identify any material weaknesses in our
internal control over financial reporting during fiscal year 2005, we cannot make
any assurances that we will not discover material weaknesses in our internal
control over financial reporting in the future. If we discover any material
weaknesses in the future, we may be required to make material changes in our
internal control over financial reporting which could negatively impact our results
of operations.
    Trading in our common stock has not been extensive, and you may have difficulty
selling your shares in the future. Our actual results may be substantially different from our forward looking statements as a
result of these and other risks and uncertainties, including the risks and uncertainties we have
detailed in our filings with the Federal 1




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Deposit Insurance Corporation and the Securities and Exchange Commission. Because of these
risks and uncertainties, there can be no assurance that our forward-looking statements included or
incorporated by reference in this annual report will prove to be accurate. These risks and
uncertainties may prevent us from achieving the current plans and objectives of the Company. In
addition, the Company does not intend to, and is not obligated to, update these forward-looking
statements after the date of this Annual Report on Form 10-KSB, even if new information, future
events or other circumstances have made them incorrect or misleading as of any future date.   PART I 
 ITEM 1. Description of Business 
 Overview First Community Corporation (the Company) is a registered bank holding company that was
incorporated under Tennessee law in 1994. The Companys activities are conducted through its
wholly-owned subsidiary, First Community Bank of East Tennessee (the Bank), which began business
in 1993 and was acquired by the Company in 1994. The Bank is a state bank chartered under the laws
of Tennessee, which was organized in late 1992 soon after the last locally-owned bank in Hawkins
County was acquired by a regional bank holding company. Since the Bank opened in April 1993
through the end of 2004, the Bank has grown to total assets of more than $202,000,000. The
Companys only subsidiaries are the Bank and two statutory trusts, Rogersville Statutory Trust I
and Rogersville Statutory Trust II, which were organized to effect long-term debt financing
transactions. The Banks primary trade area comprises Hawkins and Sullivan Counties, Tennessee, which had
populations of approximately 55,000 and 153,000 respectively, according to the most recent census
estimates available. Operating as a full-service commercial bank, the Bank provides a range of financial services
including checking deposit accounts, NOW accounts, money market and savings accounts, certificates
of deposit, individual retirement accounts, money transfers, and safe deposit facilities. The
banks lending activity includes business working capital financing, agricultural development
financing, real estate financing, and consumer loans for uses such as home improvements and
automobile purchases. The Bank is not authorized to provide trust services. The Bank considers its primary market for loans and deposits to be individuals,
small-to-medium size businesses and professionals in upper East Tennessee. The Bank actively
solicits business in this target market and considers the potential growth opportunities to be
favorable. The Banks principal customers are generally concentrated in the Hawkins County and
Sullivan County areas, although the Bank is not dependent upon a single customer or a very few
customers, with the exception of a $10 million certificate of
deposit and a checking account with an average balance of $5.2
million from a local governmental
entity. However, a substantial percentage of the Banks total loans is secured by commercial real
estate, most of which property is located in Sullivan County, Tennessee. Accordingly, the Company
has a significant concentration of credit that is dependent, under certain circumstances, on the
continuing strength of the local real estate market. The Bank is subject to the regulatory authority of the Department of Financial Institutions of
the State of Tennessee and the Federal Deposit Insurance Corporation (the FDIC), which currently
insures the depositors of each member bank to a maximum of $100,000 per depositor. For this
protection, the Bank pays a quarterly statutory assessment and is subject to the rules and
regulations of the FDIC. When 2004 ended, the Bank served the Rogersville, Church Hill, and Kingsport communities with
six full-service banking centers:  
    the main office in Rogersville at 809 West Main Street;
    Rogersville at 1104 East Main Street;
    inside the Rogersville Super Wal-Mart Store at 4331 Highway 66;
    the Church Hill office at 441 Richmond Street;
    the Downtown Kingsport office at 444 East Center Street; and
    the new Kingsport office in Colonial Heights at 3865 Fort Henry Drive. 2




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The Banks growth has been steady and intentional. The Church Hill office was opened in
December 1994 as a state-of-the-art banking facility in the center of Church Hills commercial
district. The additional Rogersville branch was opened in 1998 to increase customer convenience
and product marketability in the Rogersville area. The Banks community visibility and general
traffic increased significantly by opening a full service branch in February 2002 in Rogersvilles
new Super Wal-Mart Store, and again by expanding its reach in October 2002 with full-service
office in downtown Kingsport. By opening its second full-service branch in Kingsport in November
2004, the Bank continues its strategy to target the densely populated east Hawkins County and
Kingsport markets with a full range of deposit and loan services. 
 Personnel The Bank employed approximately 64 people as of December 31, 2004, with approximately 57
employed on a full-time basis. Although the Bank has been in existence for only 11 years, its
personnel have career experience in the banking industry ranging from one to 35 years and have been
primarily recruited throughout East Tennessee from a variety of financial institutions. The
Company has no employees who are not also employed by the Bank. 
 Competition Tennessee law permits any bank or savings association located in Tennessee to open branches in
any county in Tennessee, and competition for consumer demand and savings deposits remains intense
in Hawkins and Sullivan Counties. The Bank currently competes in the Hawkins County area with nine
commercial banks and in Sullivan County with twelve banks and one savings association. The Bank
also competes generally with insurance companies, credit unions, and other financial institutions,
as well as companies that have expanded into the quasi-financial market, and some of these
competitors are much larger than the Bank. Some of the financial institutions competing with the
Bank are long-time corporate citizens of the Banks trade area and offer additional services to
their customers not offered by the Bank. As well, these larger, older competitors have greater
resources and deposit strength and significant expertise in the industry. 
 Lending Services and Loan Review Various types of secured and unsecured commercial, consumer and real estate loans are offered
by the Bank. The Banks current policy is to make loans primarily to borrowers who maintain
depository relationships with the Bank or reside or work in the Banks market areas. Real estate
loans typically are made only when such loans are secured by real property located in East
Tennessee. On a limited basis the Bank purchases installment sales contracts for certain consumer
goods (namely, furniture) and farm equipment. The Bank provides each lending officer with written loan guidelines. Lending authority is
delegated by the Board of Directors to loan officers, each of whom has limited authority to extend
secured and unsecured credit. Any credit with an aggregate commitment to any one borrower under
$500,000 can be approved by a committee consisting of the President, Executive Vice President and
the Senior Lending Officer. Any credit with an aggregate commitment to any one borrower in excess
of $500,000 up to $2,000,000 must have the approval of the Loan Committee of the Board of
Directors, which consists of both management and non-management directors of the Bank. Any credit
with an aggregate commitment to any one borrower in excess of $2,000,000 must have the approval of
the Board of Directors. A senior vice president must approve all loan commitments for unsecured
loans in excess of $7,500 prior to their issuance. The Bank continually reviews its loan portfolio to determine deficiencies and the corrective
actions to be taken. The review process is outsourced and therefore, independent of loan
origination responsibilities. A minimum of 30% of total loans is reviewed annually along with 100%
of those borrowers with aggregate indebtedness in excess of $250,000. Past due loans are reviewed
by an internal loan officer committee, and a summary report of those loans is reviewed monthly by
the Board of Directors. A report of loan review findings is presented quarterly to the Banks
Board of Directors. 3




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Investment Policy The Banks general investment portfolio policy is to maximize income consistent with
liquidity, asset quality and regulatory constraints and to maintain assets that can be pledged to
secure government deposits. Both the Banks Investment Committee and Board of Directors review
this policy from time to time. Individual transactions, portfolio composition and performance are
reviewed and approved quarterly by the Board of Directors or a committee thereof. The President of
the Bank implements this policy and reports monthly to the full Board of Directors on the
outstanding balances, maturities, market value, federal taxable equivalent yields and appreciation
or depreciation by investment category. 
 Monetary Policies The result of operations of the Bank and the Company are affected by credit policies of
monetary authorities, particularly the Board of Governors of the Federal Reserve System. The
instruments of monetary policy employed by the Federal Reserve Board include open market operations
in U.S. government securities, changes in the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. In view of changing conditions in the national economy
and in the money markets, as well as the effects of actions by monetary and fiscal authorities,
including the Federal Reserve Board, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the effect of such matters on the business and
earnings of the Company. 
 Supervision and Regulation 
 Overview. In the following sections, we will briefly review matters related to our one-bank holding
company known as First Community Corporation, referred to in this annual report as the Company,
to federal and state regulation of the Company and the Bank, to dividends, to our capital
requirements, and prompt corrective actions, and to a few other matters related to the Companys
and the Banks operations. This discussion is far from exhaustive and has been discussed by the
Company at greater length in prior annual reports on Form 10-KSB. This discussion is meant to be
informative but not comprehensive, and does not constitute legal advice about any aspect of the
Companys or the Banks businesses. Other state and federal legislation and regulations directly
and indirectly affecting banks and other financial institutions likely are to be enacted or
implemented in the future; however, such legislation and regulations and their effect on the
business of the Company and the Bank cannot be predicted. The Company and the Bank are subject to extensive regulation under state and federal statutes
and regulations. These laws are generally intended to protect depositors and not shareholders.
Among other things, federal and state laws regulate the Companys corporate governance, its
investment authority, its manner of doing business, its employment practices, its community
reinvestment obligations, its consumer privacy policies and procedures, its relationship with the
Bank and any other affiliates, its ability to merge with, acquire, or be acquired by other
entities, its requisite minimum capital and the forms of capital, its payment of dividends or other
distributions, the types of businesses in which it can engage, and many other aspects of its
business. The Company is subject to examination and supervision by the Federal Reserve Board and
the Tennessee Department of Financial Institutions and it must pay for such examination and
supervision. 
 Organization. The Company is a bank holding company subject to the supervision of the Board of Governors of
the Federal Reserve System (the Federal Reserve or the Federal Reserve Board) under the Bank
Holding Company Act of 1956, as amended. As a bank holding company, the Company is required to
file financial information with the Federal Reserve periodically and is subject to periodic
examination by the Federal Reserve. The Bank is incorporated under the laws of the State of Tennessee, and as such, is subject to
provisions of the Tennessee Banking Act and the supervision of and regular examination by the
Tennessee Department of Financial Institutions (the Department). The Bank is a member of the
FDIC and thus is subject also to the provisions of the Federal Deposit Insurance Act and to
supervision and examination by the FDIC. 4




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Capital. The Federal Reserve Board and the FDIC have adopted final risk-based capital guidelines for
bank holding companies. The minimum guidelines for the ratio of total capital to risk weighted
assets (including certain off balance sheet activities, such as standby letters of credit) is
8.00%. At least half of the total capital must be composed of Tier 1 or core capital, which
consists of common stockholders equity, minority interests in the equity accounts of consolidated
subsidiaries non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual
preferred stock, less goodwill . The remainder, Tier 2 Capital, may consist of subordinated debt,
other preferred stock and a limited amount of loan loss reserves. At December 31, 2004, the Banks
risk-based Tier 1 Capital and risk-based total capital ratios were 10.46% and 11.49%, respectively. Failure to meet FDIC capital requirements can subject an FDIC-insured state bank to a variety
of enforcement remedies, including issuance of a capital directive, termination of deposit
insurance and a prohibition on the taking of brokered deposits. Substantial additional
restrictions can be imposed under the prompt corrective action regulations, as described below. 
 Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires the
Federal banking regulators to assign to each insured institution one of five capital categories
(well capitalized, adequately capitalized or one of three under-capitalized categories) and to
take progressively more restrictive regulatory actions depending upon the assigned category. Under
the prompt corrective action regulations adopted pursuant to FDICIA, in order to be considered
adequately capitalized, national banks must have a risk-based Tier 1 Capital ratio of at least
4%, a risk-based total capital ratio of 8% and a Tier 1 leveraged capital ratio of at least 4%.
Well-capitalized institutions are those that have a risk-based Tier 1 Capital ratio above 6%, a
risk-based total capital ratio above 10% and a Tier 1 leveraged capital ratio above 5%, and that
are not subject to a written agreement, order or capital directive to maintain capital at a
specific level. As of December 31, 2004, the Bank was considered a well capitalized institution
under these definitions. All institutions, regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees that would cause the institution to fail to satisfy the
minimum levels to be considered adequately capitalized. If an institution failed to meet the
minimum level for any relevant capital measure (an undercapitalized institution) it would be (i)
subject to increased monitoring by the appropriate federal banking regulator, (ii) required to
submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits;
and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of
business. The bank regulatory agencies have discretionary authority to reclassify well-capitalized
institutions as adequately capitalized or to impose on adequately capitalized institutions
requirements or actions specified for undercapitalized institutions, 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 one or more unsafe or unsound practices. The receipt of an unsatisfactory
examination rating may provide a basis for finding unsafe and unsound conditions or practices if
the deficiencies cited are not corrected. A significantly undercapitalized institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to regulatory demands for
recapitalization, broader applications of restrictions on transactions with affiliates, limitations
on interest rates paid on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also be required to
divest the institution, or the institution could be required to divest subsidiaries. The senior
executive officers of a significantly undercapitalized institution may not receive bonuses or
increases in compensation without prior approval, and the institution is prohibited from making
payments of principal or interest on its subordinated debt. If an institutions ratio of tangible
capital to total assets falls below a level established by the appropriate federal banking
regulator (the critical capital level), which may not be less than 2% nor more than 65% of the
minimum tangible capital level otherwise required, the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations are made that
forbearance from such action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory agencies, a
critically undercapitalized institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after the date it became
critically undercapitalized. 5




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Payment of Dividends. The Company is a legal entity separate and distinct from the Bank. The principal source of
the Companys revenues, however, is from dividends declared by the Bank. Under Tennessee law, the
Bank can only pay dividends in an amount equal to or less than the total of its net income for that
year combined with retained net income of the preceding two (2) years. Payment of dividends in
excess of this amount requires prior approval by the commissioner of the Department. The Banks
ability to pay dividends also may depend on its ability to meet minimum capital levels established
from time to time by FDIC. Under such regulations, FDIC-insured state banks are prohibited from
paying dividends, making other distributions or paying any management fee to a parent if, after
such payment, the Bank would fail to have a risk-based Tier 1 Capital ratio of 4%, a risk-based
total capital ratio of 8% and a Tier 1 leverage capital ratio of 4%. Under Tennessee law, the Company may pay common stock dividends if, after giving effect to the
dividends, the Company can pay its debts as they become due in the ordinary course of business and
the Companys total assets exceed its total liabilities. The payment of dividends by the Company
also may be affected or limited by certain factors, such as the requirements to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory
authority, a bank holding company or a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial condition of the bank,
could include the payment of dividends), such authority may take various supervisory actions to
prevent such action, including a cease and desist order prohibiting such practice. (See ITEM 5.
Market for Registrants Common Equity and Related Stockholder Matters  Payment of Dividends.) 
 The Companys Support of the Bank. Under Federal Reserve Board policy, the Company is expected to act as a source of financial
strength and to commit resources to the Bank. Such support may be required at times when, absent
such Federal Reserve Board policy, the Company may not be inclined to provide it. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), a
depository institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any
commonly controlled FDIC-insured depository institution in danger of default. Default is
defined generally as the appointment of a conservator or receiver and in danger of default is
defined generally as the existence of certain conditions indicating that a default is likely to
occur in the absence of regulatory assistance. 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 banks. In the
event of a bank holding companys bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank must be assumed by the
bankruptcy trustee and entitled to a priority of payment over certain other creditors. 
 Restrictions on Transactions with Affiliates and Insiders. The Bank is subject to certain federal statutes limiting transactions with non-banking
affiliates and insiders. Section 23A of the Federal Reserve Act limits loans or other extensions of
credit to, asset purchases with and investments in affiliates of the Bank, such as the Company, to
ten percent (10%) of the Banks capital and surplus. Further, such loans and extensions of credit,
as well as certain other transactions, are required to be secured in specified amounts. Section 23B
of the Federal Reserve Act, among other things, requires that certain transactions between the Bank
and its affiliates must be on terms substantially the same, or at least as favorable to the Bank,
as those prevailing at the time for comparable transactions with or involving other nonaffiliated
persons. In the absence of comparable transactions, any transaction between the Bank and its
affiliates must be on terms and under circumstances, including credit standards that in good faith
would be offered to or would apply to nonaffiliated persons. The restrictions on loans to officers, directors, principal shareholders and their
related interests (collectively referred to as insiders) contained in the Federal Reserve Act and
Regulation O apply to all institutions and their subsidiaries. These restrictions include limits on
loans to one borrower and conditions that must be met before such loans can be made. Loans made to
insiders and their related interests cannot exceed the institutions total unimpaired 6




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capital and surplus. Insiders are subject to enforcement actions for knowingly accepting loans
in violation of applicable restrictions. All extensions of credit by the Bank to its insiders are
in compliance with these restrictions and limitations. Loans outstanding to executive officers and directors of the Bank, including their
immediate families and affiliated companies (related parties), aggregated $4,891,467 at December
31, 2004 and $5,484,079 at December 31, 2003. Loans to related parties are made in the ordinary
course of business under normal credit terms, including interest rates and collateral, prevailing
at the time of origination for comparable transactions with other persons, and do not represent
more than normal credit risk. 
 Acquisition and Expansion. Subject to certain exceptions and the ultimate impact of the federal Interstate Banking Act,
both a bank holding company and an out-of-state bank are prohibited under Tennessee law from
acquiring control of, merging, or consolidating with a Tennessee bank, unless the Tennessee bank
has been in operation for at least three years. Notwithstanding the these prohibitions, a bank
which does not have its home state in Tennessee may establish or acquire a branch in Tennessee
through the acquisition of all or substantially all of the assets and the assumption of all or
substantially all of the liabilities of or related to a branch located in Tennessee which has been
in operation for at least three years, provided that the laws of the out-of-state banks home state
permit Tennessee banks to establish and maintain branches in that state through the acquisition of
a branch under substantially the same terms and conditions. A bank or bank holding company is
prohibited from acquiring any bank in Tennessee if the bank or bank holding company (including all
insured depository institutions which are affiliates of the bank or bank holding company), upon
consummation of the acquisition, would control thirty percent (30%) or more of the total amount of
the deposits of the insured depository institutions in Tennessee. Under Tennessee law, any
Tennessee bank that has been in operation for at least three years may be acquired, under certain
circumstances, by banks and bank holding companies from inside or outside Tennessee. Acquisitions
are subject to the approval of the Commissioner of the Department, the FDIC, and the Federal
Reserve Board based upon a variety of statutory and regulatory criteria. Branching is regulated
generally by the Department and the FDIC pursuant to certain state and federal law requirements. 
 FDIC Insurance. The FDIC has adopted a risk-based assessment system for insured depository institutions that
takes into account the risks attributable to different categories and concentrations of assets and
liabilities. The system assigns an institution to one of three capital categories: (1) well
capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described above, with the
undercapitalized category including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC
also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation
that the institutions primary federal regulator provides to the FDIC and information that the FDIC
determines to be relevant to the institutions financial condition and the risk posed to the
deposit insurance funds. Insurance of deposits may be terminated by the FDIC upon a finding 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. 
 General Effect of Federal Monetary Policy. The earnings and business of the Company are and will be affected by the policies of various
regulatory authorities of the United States, especially by the Federal Reserve Board. The Federal
Reserve Board, among other functions, regulates the supply of credit and deals with general
economic conditions within the United States. The instruments of monetary policy employed by the
Federal Reserve Board for these purposes influence in various ways the overall level of
investments, loans, other extensions of credit and deposits, and the interest rates paid on
liabilities and received on assets. 
 Effect of Specific Legislation. 
 Standards for Safety and Soundness.
FDICIA requires the federal bank regulatory
agencies to prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating to: 7




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(i) internal controls, information systems and audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation,
fees and benefits. The compensation standards must prohibit employment contracts, compensation or
benefit arrangements, stock option plans, fee arrangements or other compensatory arrangements that
would provide excessive compensation, fees or benefits or could lead to material financial loss,
but (subject to certain exceptions) may not prescribe specific compensation levels or ranges for
directors, officers or employees. In addition, the federal banking regulatory agencies would be
required to prescribe by regulation standards specifying: (i) maximum classified assets to capital
ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; and (iii) to
the extent feasible, a minimum ratio of market value
to book value for publicly-traded shares of depository institutions and depository institution
holding companies. 
 Community Reinvestment Act.
The federal law known as the Community Reinvestment Act
requires that each insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local community, including
low and moderate income neighborhoods, consistent with the safe and sound operation of the
financial institution. These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility. A banks compliance with its CRA obligations is based
on a performance-based evaluation system assigning a CRA rating according to the institutions
lending service and investment performance. When a bank holding company applies for approval to
acquire a bank or other bank holding company, the Federal Reserve Board will review the assessment
of each subsidiary bank of the applicant bank holding company, and such records may be the basis
for denying the application. In connection with an assessment of CRA performance, the appropriate
bank regulatory agency assigns a rating of outstanding, satisfactory, needs to improve or
substantial noncompliance. 
 Consumer Protection Provisions.
FDICIA seeks to encourage enforcement of existing
consumer protection laws and enacts new consumer-oriented provisions including a requirement of
notice to regulators and customers for any proposed branch closing and provisions intended to
encourage the offering of lifeline banking accounts and lending in distressed communities.
FDICIA also requires depository institutions to make additional disclosures to depositors with
respect to the rate of interest and the terms of their deposit accounts. 
 Additional Significant Matters.
FDICIA extends the deadline for the mandatory use of
state-certified and state-licensed appraisers and authorizes acquisitions of banks by savings
associations on the same terms as savings associations may be acquired by banks. With certain
exceptions, state-chartered banks are limited to the activities of national banks. The federal
bank regulatory agencies are required to biannually review risk-based capital standards to ensure
that they adequately address interest rate risk, concentration of credit risk and risks from
non-traditional activities. FDICIA also made extensive changes in the applicable rules regarding audit, examinations and
accounting. FDICIA generally requires annual on-site full-scope examinations by each banks
primary federal regulator. FDICIA also imposes new responsibilities on management, the independent
audit committee and outside accountants to develop, approve or attest to reports regarding the
effectiveness of internal controls, legal compliance and off-balance-sheet liabilities and assets. 
 Gramm-Leach-Bliley Act. The activities permissible to bank holding companies and
their affiliates were substantially expanded by the Gramm-Leach-Bliley Act that the President
signed into law on November 12, 1999. Effective March 11, 2000, the Gramm-Leach-Bliley Act removed
Federal and state law barriers that prevented banking organizations, such as the Company, from
affiliating with insurance organizations and securities firms. An eligible bank holding company
may elect to be treated as a financial holding company and, as such, it may engage in financial
activities (activities that are financial in nature, such as insurance and securities underwriting
and dealing activities) and activities the Federal Reserve determines to be complementary to
financial activities that do not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. To be eligible to elect the status of a financial
holding company, all of the depository institution subsidiaries of the bank holding company must
meet the requirements of their regulators to be considered well managed and well capitalized and
have a CRA rating of at least satisfactory. Bank holding companies that do not elect the status
of a financial holding company may continue to engage in and own companies conducting nonbanking
activities that had been approved by Federal Reserve order or regulation prior to November 12,
1999. The Federal Reserve and Treasury Secretary determine what activities qualify as financial in
nature. A financial holding company will not be required to obtain prior Federal Reserve approval
in order to engage in the financial activities identified in the Act, other than in connection with
an acquisition of a thrift institution. However, a financial holding company will not be able to
commence, or acquire, any new financial activities if one of its 8




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depository institution subsidiaries receives a less than satisfactory CRA rating. In
addition, if any of its depository institution subsidiaries ceases being well capitalized or well
managed, and compliance is not achieved within 180 days, a financial holding company may be forced,
in effect, to cease conducting business as a financial holding company by divesting either its
nonbanking financial activities or its banks. Subject to certain exceptions, national banks are also able to engage in financial activities
through separate subsidiaries. As a general rule, financial subsidiaries of national banks will
not be permitted to engage as principal in underwriting insurance or issuing annuities, real estate
development or investment, merchant banking (for at least 5 years) or insurance company portfolio
activities in which financial holding companies may engage. Insured state banks are permitted to
control or hold an interest in a financial subsidiary that engages in the same type of activities
permissible for national banks. Conducting financial activities through a bank subsidiary can
impact capital adequacy, and restrictions apply to affiliate transactions between the bank and its
financial subsidiary. The banking, securities and insurance activities of financial organizations will be
functionally regulated by the banking regulators, the Securities and Exchange Commission and state
securities regulators and organizations, and the state insurance regulators, respectively.
Consistent with this functional approach, banks are no longer excluded from the definition of a
broker or a dealer under the Federal securities laws. Limited exemptions exist for specific types
of bank activities, including an exemption to permit banks to continue to offer on-site third party
brokerage services under certain conditions. Banks advising registered investment companies are
required to register as investment advisors, and only collective investment funds (common trust
funds) that are employed by banks solely as an aid to the administration of trusts, estates, or
other fiduciary accounts will be able to avoid the registration requirements imposed on investment
companies. In particular, under the Graham-Leach-Bliley Act, financial institutions are required to
disclose their policies 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 the institutions 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
through electronic mail to consumers. The Bank has established a privacy policy to ensure
compliance with federal requirements. Management does not believe that this financial services modernization legislation has
negatively affected, or will negatively affect, the Banks operations. However, as banks,
securities firms and insurance companies continue to consolidate the financial services industry,
the Company will face an increasing number of larger financial institutions that offer a wider
variety of financial services than the Companys Bank subsidiary presently offers and that can
aggressively compete in the markets served by the Bank. 
 USA Patriot Act of 2001. On October 6, 2001, President Bush signed the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA Patriot Act) of 2001. Among other provisions, the USA Patriot Act (i) prohibits banks from
providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence
requirements on banks opening or holding accounts for foreign financial institutions or wealthy
foreign individuals; (iii) requires financial institutions to establish an anti-money laundering
compliance program; and (iv) eliminates civil liability for persons who file suspicious activity
reports. The USA Patriot Act also increases governmental powers to investigate terrorism,
including expanded governmental access to account records. The federal Treasury Department has
issued regulations under the USA Patriot Act. The regulations state that a depository institution
will be deemed in compliance with the Act provided it continues to comply with the current Bank
Secrecy Act regulations. The Department of the Treasury has also adopted regulations intended to
prevent money laundering and terrorist financing through correspondent accounts maintained by U.S.
financial institutions on behalf of foreign banks. Financial institutions are required to take
reasonable steps to ensure that they are not providing banking services directly or indirectly to
foreign shell banks. Any financial institution complying with these rules will not be deemed to
have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above. Management
of the Company and the Bank believe that systems and procedures are currently in effect to
accomplish compliance with these requirements. This law and the related regulations impose
continuing costs on the Company and the Bank but management believes that the cost is not likely to
be material. 
 Sarbanes-Oxley Act of 2002.In July 2002, Congress enacted the Sarbanes-Oxley Act of
2002 (Sarbanes-Oxley) which imposed significant additional requirements and restrictions on
publicly-held companies, such as the Company. These provisions include requirements governing the
independence, composition and responsibilities of 9




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audit committees, financial disclosures and reporting and restrictions on personal loans to
directors and officers. Sarbanes-Oxley, among other things,mandates chief executive and chief
financial officer certifications of periodic financial reports, additional financial disclosures
concerning off-balance sheet items, and speedier transaction reporting requirements for executive
officers, directors and 10% shareholders. Rules promulgated by the SEC pursuant to Sarbanes-Oxley
impose obligations and restrictions on auditors and audit committees intended to enhance their
independence from management. In addition, penalties for non-compliance with the Exchange Act are
heightened. The Company has not experienced any significant difficulties in complying with this
legislation. However, the Company has incurred, and expects to continue to incur, costs in
connection with its compliance with Section 404 of Sarbanes-Oxley, which will require management to
undertake an assessment of the adequacy and effectiveness of the Companys internal controls over
financial reporting and requires the Companys auditors to attest to, and report on, managements
assessment and the operating effectiveness of these controls for the Companys 2006 fiscal year. 
 Other Consumer Laws and 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 a number of federal laws applicable to credit
transactions, including the following:  
    The Soldiers and Sailors Civil Relief Act of 1940, which generally prohibits
lenders from charging an annual interest rate in excess of 6% on any obligations
for which the borrower is a person on active duty with the United States military
and which governs the repayment terms of, and property rights underlying, secured
obligations of persons in military service;
    Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
    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;
    Equal Credit Opportunity Act, prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit;
    Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
    Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies;
    Rules and regulations of the various federal agencies charged with the
responsibility of implementing the federal laws. The Banks deposit operations are subject to the following:  
    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
    Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to
implement that act, 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.
    The Check Clearing for the 21st Century Act, or  Check 21 as it is commonly
known (effective October 28, 2004), which facilitates check collection by creating
a new negotiable instrument called a substitute check, and permits, but does not
require, banks to replace original checks with substitute checks or information
from the original check and process check information electronically. Banks that do
use substitute checks must comply with certain notice and recredit rights. Check 21
is expected to cut the time and cost involved in physically transporting paper
items and reduce float, i.e., the time between the deposit of a check in a bank and
payment, 10




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especially when items were not already being delivered same-day or overnight. The
Bank intends to utilize the Check 21 authority and expects to incur additional costs
for technology necessary to process check information electronically. 
 Other Pending and Proposed Legislation. Other legislative and regulatory initiatives
that could affect the Company, the Bank and the banking industry in general are pending, and
additional initiatives may be proposed or introduced, before the U.S. Congress, the federal
executive branch, the Tennessee legislature and other governmental bodies in the future. Such
proposals, if enacted, may further alter the structure, regulation and competitive relationship
among financial institutions, and may subject the Bank to increased regulation, disclosure and
reporting requirements. In addition, the various banking regulatory agencies often adopt new rules
and regulations to implement and enforce existing legislation. Management cannot predict whether,
or in what form, any such legislation or regulations may be enacted or the extent to which the
business of the Company or the Bank would be affected thereby. 
 ITEM 2. Description of Property 
 Overview The Bank operates a main office, an operations center, and five branches in Rogersville,
Church Hill, and Kingsport, Tennessee. The Bank owns six of these properties and subleases one.
All of the Banks properties have been constructed new or remodeled within the past 11 years. The
Bank owns and operates automated teller machines (ATMs) located at the main office and the five
branch locations. 
 Owned Properties 
 Main Office. The main office, at 809 West Main Street in Rogersville, is housed in a one-story, 8,400
square foot brick building owned by the Bank. 
 Operations Center, Branch Sites and Undeveloped Property. In Rogersville, the Bank owns property acquired in 1997 on which an existing structure was
remodeled to house an operations center that was relocated from the main office. This facility is
located at 1101 East McKinney Avenue. The Bank also owns a branch office constructed in 1998
located at 1104 East Main Street that comprises a 3,500 square foot building with a three lane
drive-through facility. In Church Hill, the Bank owns and operates a 4,800 square foot branch facility, constructed in
1994, that is located on Highway 11 West. In downtown Kingsport, the Bank acquired a three-story, 10,560 square-feet building at 444
East Center Street. This building was remodeled and opened as a new branch in October 2002. The
Bank occupies all three floors. On January 29, 2004, the Bank exercised a purchase option for $506,000 to purchase land for an
additional branch location in Kingsport. After receiving FDIC approval, the Bank opened its newest
branch on November 29, 2004, in the Kingsport neighborhood of Colonial Heights located at 3865 Fort
Henry Drive. The Bank owns and operates the 3,200 square-feet building which is all-new
construction completed when the branch was opened. The Bank also owns undeveloped properties on West Main Street in Rogersville that are
available for future expansion. 11




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Leased Property The Bank opened a full-service branch in February 2002 inside the Super Wal-Mart Store on
Highway 66 South in Rogersville. The Bank occupies 540 square feet of space within the Super
Wal-Mart Store pursuant to a sublease agreement between the Bank and Wal-Mart Stores East, Inc. as
sublessor. The initial term of the sublease is five years, and the Bank has the right (if not then
in default) to extend the term of the sublease for up to two consecutive renewal terms of five
years each after delivering the required notice to the sublessor. 
 Real Estate Investments Other than normal real estate commercial lending activities of the Bank, the acquisition of
mortgage-backed securities held in Companys investment securities portfolio, the ownership of
branch office facilities, and consumer mortgage lending, the Company and its subsidiaries generally
do not invest in real estate, interests in real estate or securities of or interests in persons
primarily engaged in real estate activities. 
 ITEM 3. Legal Proceedings As of the date hereof, there are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party of or which any of its or its subsidiaries properties are
subject. There are no material proceedings known to the Company or any of its subsidiaries to be
contemplated by any governmental authority. There are no material proceedings known to the Company
or any of its subsidiaries, pending or contemplated, in which any director, officer or affiliate or
any principal security holder of Company or any of its subsidiaries or any associate of any of the
foregoing, is a party adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries. 
 ITEM 4. Submission of Matters to a Vote of Shareholders No matter was submitted to a vote of security holders during the fourth quarter of the
Companys fiscal year ending December 31, 2004. PART II 
 ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters 
 Trading History The Companys common stock is not traded on an exchange, and although shares of the
Corporations common stock are traded from time to time in private transactions, there is no
established public trading market for the stock. No broker makes a market in the Companys stock,
and trading has not been extensive. Based solely on information made available to the Company from
a limited number of buyers and sellers, management believes that the following table reasonably
estimates the high and low sales prices for the Companys common stock during 2004 and 2003: 12




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##### Table of Contents



2004
    
    High
    
    
    LowFirst quarter
    
    $
    18.00
    
    
    
    16.00Second quarter
    
    
    19.00
    
    
    
    17.50Third quarter
    
    
    20.00
    
    
    
    16.00Fourth quarter
    
    
    20.00
    
    
    
    18.75
 2003
    
    High
    
    
    LowFirst quarter
    
    $
    16.00
    
    
    
    15.00Second quarter
    
    
    16.50
    
    
    
    14.00Third quarter
    
    
    17.00
    
    
    
    14.00Fourth quarter
    
    
    16.00
    
    
    
    15.00
 The most recent trade of the Companys common stock known to the Company occurred on March 4,
2005, at a price of $20 per share. These sales are isolated private transactions and, given the
small volume of trading in the Companys stock, may not be indicative of its present value. As of December 31, 2004, there were 1,911,760 shares of the Companys common stock
outstanding, and as of March 30, 2005, there were 1,913,452 shares of the Companys common stock
outstanding. 
 Equity Holders As of December 31, 2004, there were approximately 864 holders of record of the Companys
common stock. 
 Payment of Dividends Dividends, when and if paid, are subject to determination and declaration by the Companys
board of directors, which consider the financial condition of the Company and the Bank, results of
operations, tax consequences, industry standards, economic conditions, and other relevant factors.
The principal source of the Companys cash revenues is dividends received from the Bank. The
payment of dividends is subject to the regulation of government authorities who may prohibit banks
and bank holding companies from paying dividends that would constitute an unsafe or unsound banking
practice. In addition, the Companys dividend policy is designed to retain sufficient amounts for
healthy financial ratios, taking into account anticipated asset growth and other prudent financial
management principles as well as applicable regulatory capital requirements. Other than the laws
and regulations noted above, which apply to all banks and bank holding companies, neither the
Company nor the Bank is currently subject to any regulatory restrictions on payment of dividends.
The Company declared a dividend of $0.28 per share in 2004 and $0.28 per share in 2003. 
 Securities Authorized for Issuance under Equity Compensation Plans The Company has two compensatory stock option plans, the 1994 Stock Option Plan, which was
ratified by the shareholders at the Companys annual meeting in 2004, and the Outside Directors
Stock Option Plan, which was adopted by the Company in 1994. The following table provides
information as of December 31, 2004, regarding the options outstanding and available under the two
plans. The 1994 Stock Option Plan and the Outside Directors Option Plan are each described in Note
14 of the Companys Financial Statements in Item 7 of this annual report. 13




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NUMBER OF SECURITIESNUMBER OF SECURITIES
    
    
    
    
    
    
    
    REMAINING AVAILABLETO BE ISSUED UPON
    
    
    
    
    
    
    
    FOR FUTURE ISSUANCEEXERCISE OF
    
    
    WEIGHTED-AVERAGE
    
    
    (EXCLUDING SECURITIESOUTSTANDING OPTIONS,
    
    
    EXERCISE PRICE OF
    
    
    REFLECTED IN COLUMNWARRANTS AND RIGHTS
    
    
    OUTSTANDING OPTIONS
    
    
    (a))(a)
    
    
    (b)
    
    
    (c)EQUITY
COMPENSATION PLANS APPROVED BY SECURITY HOLDERS
    
    
    
    56,235
    
    
    
    $
    13.71
    
    
    
    
    260,000TOTAL
    
    
    
    56,235
    
    
    
    $
    13.71
    
    
    
    
    260,000
 The Company did not repurchase any shares of its common stock during the quarter ended December 31,
2004. 
 ITEM 6. Managements Discussion and Analysis of Financial Condition and Results of Operations 
 Overview This section presents managements analysis of the financial condition and results of
operations of the Company as of and for each of the years in the two-year period ending on December
31, 2004. This information includes the statistical disclosures required by the Securities and
Exchange Commissions Industry Guide 3 for Bank Holding Companies. The Companys business activity
is currently limited to holding 100% of the issued and outstanding stock of the Bank. Accordingly,
the discussion that follows relates principally to the financial condition and results of
operations of the Bank. This discussion should be read in conjunction with the consolidated
financial statements and accompanying notes. Statements contained in this report that are not purely historical are forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended,
including the Companys expectations, intentions, beliefs, or strategies regarding the future. All
forward-looking statements concerning economic conditions, rates of growth, rates of income or
values as may be included in this report are based on information available to the Company on the
date noted, and the Company assumes no obligation to update any such forward-looking statements.
It is important to note that the Companys actual results could differ materially from those in
such forward-looking statements. Risk and uncertainties that could cause or contribute to such
material differences include, but are not limited to, general economic conditions including
inflation, the interest rate environment, competitive conditions in the financial services industry
including product and pricing pressures in the Banks geographic and business areas of operation,
changes in law, government policies and regulations, and rapidly changing technology affecting
services. (See Risks, Uncertainties and Forward Looking Statements preceding Item 1 of this
report.) 
 Financial Condition The Bank grew in total assets by $13.3 million or 7.1% during 2004, ending the year at $202.1
million in total assets. Loans increased $14.6 million or 9.5% during 2004. Commercial real
estate loans comprise the majority of this increase. The growth in loans was funded by a
combination of utilization of existing liquidity, growth in depositsboth from the national
institutional certificate of deposit market and local markets, and Federal Home Loan Bank advances. Institutional certificates of deposit obtained on the national market decreased $0.2 million
during 2004, ending the year at $18.3 million. Deposit promotions held at all bank locations
resulted in the deposit growth. No material portion of the Banks deposits has been obtained from
any single person or group of persons, with the exception of a $10 million certificate of deposit
and a checking account with a 2004 average outstanding balance of $5.2 million from a local
government entity. 14




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Deposits grew at a slower pace than loans in 2004, with loan growth exceeding deposit growth
by $12.6 million. As a result, the Banks investment of $6.6 million at December 31, 2003 in
overnight federal funds sold was used to fund loans in 2004. In addition, due to the limited
deposit growth in 2004, loans were also funded with $7.0 in Federal Home Loan Bank advances. Consistent with the overall trend in the banking industry, the retail portion of the Banks
business is declining due to increased competition from automobile manufacturers and credit unions
for automobile loans and other types of consumer loans. In addition, the Bank continues its policy
not to retain a material portfolio of fixed rate mortgage loans. The Bank sells fixed rate
mortgages on the secondary market and, as such, the Banks existing residential mortgage loan
portfolio consists primarily of adjustable rate loans. With mortgage rates at historically low
levels not seen in 50 years, the refinancing boom has affected the Banks portfolio with transfers
out to fixed rate products from secondary market lenders. It is anticipated that the trend of flat
or declining consumer lending and increasing growth in the commercial real estate portfolio will
continue in future years. Management relies upon local area deposits as a stable source of funding. The Bank had total
deposits of $160.3 million as of December 31, 2004, compared to $158.3 million of December 31,
2003, representing an increase of $2.0 million or 1.3%. Average outstanding deposits in 2004
increased 9.4%, or $12.2 million to $142.9 million from $130.7 million in 2003. The deposit base is supplemented with alternative funding sources such as federal funds
purchased, securities sold under agreement to repurchase and Federal Home Loan Bank (FHLB) advances
to fund loan growth. The average balances of federal funds purchased, securities sold under
agreement to repurchase and FHLB advances amounted to $18.4 million, and $16.2 million, for the
years ended December 31, 2004 and 2003. Due to the highly competitive local market for deposits,
management anticipates the continued use of alternative funding sources to partially fund loan
growth. In September 2004, the Company, through Rogersville Statutory Trust II and with the assistance
of its Placement Agent, sold to investors $3,000,000 of trust preferred securities. The rate,
which varies quarterly with LIBOR, was 4.80% as of December 31, 2004. The securities mature on
September 20, 2034, however, the maturity may be accelerated to a date not earlier than September
20, 2009. They are presented in the liabilities section on the balance sheet and count as Tier 1
capital for regulatory purposes (subject to regulatory limitations of 25% of capital). Any
remaining balance qualifies as Tier 2 capital up to applicable regulatory guidelines. A portion of
the proceeds was used to repay the outstanding balance of $350,000 on a note payable to an
unrelated institution. The Company had previously issued $4,000,000 of trust preferred securities
in 2001. These securities remain outstanding and also qualify for regulatory capital purposes.
The rate on these securities was 6.11% at December 31, 2004 and varies quarterly with LIBOR. Nonperforming assets consist of (1) nonaccrual loans where the recognition of interest income
was discontinued, (2) loans which have been restructured to provide for a reduction or deferral of
interest or principal because the borrowers financial condition deteriorated, and (3) foreclosed
and repossessed assets. Nonperforming assets at December 31, 2004 were $250,000 or 0.02% of total
loans, up from $228,000 or 0.02% at December 31, 2003. Past due loans are loans contractually past due 90 days or more as to interest or principal
payments, but have not yet been placed on nonaccrual status. These loans totaled $45,000 or 0.03%
of total loans at December 31, 2004, as compared to $33,000 or 0.02% of total loans at December 31,
2003. Managements policy is to maintain the allowance for loan losses at a level sufficient to
absorb all estimated losses inherent in the loan portfolio. The allowance for loan losses was 1.12%
of outstanding loans at December 31, 2003, compared to 1.13% at December 31, 2003. Management believes that a strong capital position is vital to continued profitability of the
Company because it promotes depositor and investor confidence and provides a solid foundation for
the future growth of the organization. Shareholders equity was $12.3 million or 6.09% of total
assets at December 31, 2004, and $10.6 million or 5.64% of total assets at December 31, 2003. At
December 31, 2004, $4.1 million of the trust preferred securities qualify as Tier I capital for
regulatory purposes. This brings the Tier I leverage ratio of the Company to 8.15% at December 31,
2004. More volatility has been introduced into equity balances with the approval of Financial
Accounting Standard 115, which specifies that securities which are categorized as available for
sale are periodically marked to 15




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market, with the adjustment included in equity, net of applicable taxes. To provide maximum
flexibility in the management of the securities portfolio, the Bank elected to categorize all
securities as available for sale. Consequently, the Banks equity balance is subject to a
relatively greater incidence of volatility. To record the fair value of securities available for
sale, shareholders equity was decreased by $73,000 at December 31, 2004 compared to an decrease of
$69,000 as of December 31, 2003. The Banks earnings performance over the past two years allowed the Board of Directors to
declare a dividend of $0.28 per share in 2004 and 2003. Additionally, the Board of Directors
develops and reviews the capital goals of the Company and the Bank. The Companys dividend policy
is designed to retain sufficient amounts for healthy financial ratios, considering anticipated
asset growth and other prudent financial management principles. (See Item 5. Market for
Registrants Common Equity and Related Stockholder MattersPayment of Dividends.) Capital adequacy in the banking industry is evaluated primarily by the use of ratios that
measure capital against assets that are weighted based on risk characteristics. These risk-based
capital ratios are presented in Note 13 to the consolidated financial statements. The Banks
capital ratios exceed regulatory minimums and compare favorably to industry averages. (See Item
1. Description of Business-Supervision and Regulations-Capital.) 
 Liquidity And Interest Rate Risk Liquidity management involves planning to meet depositors and borrowers cash flow
requirements at a reasonable cost, as well as developing contingency plans to meet unanticipated
funding needs or a loss of funding sources. Liquidity is immediately available from three major
sources: (1) cash on hand and on deposit at other banks, (2) the outstanding balance of federal
funds sold and (3) the available for sale securities portfolio. Bank management also considers the
scheduled repayments of loans and the maturities of securities when analyzing liquidity. In
addition, the Bank has federal fund lines of credit totaling $14.7 million established with their
correspondent banks and is a member of the Federal Home Loan Bank (FHLB). As a member of the FHLB,
both short and long term advances can be obtained based primarily upon the level of residential
mortgage, commercial real estate and agricultural real estate loan financing in the Banks loan
portfolio. The Banks current borrowing capacity is approximately $38.4 million at the FHLB, of
which $11.6 million is available for future use. Interest rate risk is the risk that future changes in interest rates will reduce the Banks
net interest income and the market value of its portfolio equity. A movement in interest rates and
the corresponding effect on net interest income may significantly affect profitability. The degree
of any potential consequences of such interest rate changes can be mitigated by maintaining a
balance between interest rate-sensitive assets and liabilities within given time frames.
Management endeavors to maintain consistently strong earnings with minimal interest rate risk by
closely monitoring the sensitivity and repricing of assets and liabilities to interest rate
fluctuations. The difference between assets and liabilities within a given repricing period is expressed as
a ratio and as a dollar amount known as the gap, both of which are used as a measure of interest
rate risk. A ratio of 100% suggests a balanced position between rate sensitive assets and
liabilities within a given repricing period. The table below reflects the Banks interest rate
sensitivity position both individually and within specified time periods and cumulatively, over
various time horizons. In the table, assets and liabilities are placed in categories based on
their actual or expected repricing date.Anticipated amortization of the loans has been reflected
in the repricing categories. In a period of generally falling interest rates, this gap position
will normally result in a decrease in net interest income. Whereas, in a period of generally
rising interest rates, this gap position will normally result in an increase in net interest
income. 16




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##### Table of Contents



Interest Rate Sensitivity Analysis Amounts Subject to Repricing or Maturing Within  0-3
    
    
    3-12
    

    
    Total
    
    
    1-5
    
    
    OverMonths
    
    
    Months
    
    
    1 Yr.
    
    
    Years
    
    
    5 Yrs.
    
    
    TotalASSETSFederal funds sold
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Securities available for sale
    
    
    
    
    
    
    10
    
    
    
    10
    
    
    
    5626
    
    
    
    10,055
    
    
    
    15,691Loans
    
    
    130,832
    
    
    
    7,619
    
    
    
    138,451
    
    
    
    25,846
    
    
    
    3,653
    
    
    
    167,950Total interest-earning
assets
    
    $
    130,832
    
    
    $
    7,629
    
    
    $
    138,461
    
    
    $
    31,472
    
    
    $
    13,708
    
    
    $
    183,641LIABILITIESInterest-bearing deposits
    
    $
    53,458
    
    
    $
    46,652
    
    
    $
    100,110
    
    
    $
    39,786
    
    
    $
    4,075
    
    
    $
    143,971Other term borrowings
    
    
    8,444
    
    
    
    
    
    
    
    8,444
    
    
    
    
    
    
    
    12,000
    
    
    
    20,444Total interest-bearing
liabilities
    
    $
    61,902
    
    
    $
    46,652
    
    
    $
    108,554
    
    
    $
    39,786
    
    
    $
    16,075
    
    
    $
    164,415Asset (liability) GAP
    
    
    68,930
    
    
    
    (39,023
    )
    
    
    29,907
    
    
    
    (8,314
    )
    
    
    (2,367
    )
    
    
    19,226Cumulative asset (liability)
GAP
    
    $
    68,930
    
    
    $
    29,907
    
    
    $
    29,907
    
    
    $
    21,593
    
    
    $
    19,226
    
    
    $
    19,226
 Included in interest-bearing deposits subject to rate change within three months are NOW, savings,
and money market deposits. These types of deposits historically have not repriced coincidentally
with or in the same proportion as general market indicators. Therefore, in addition to monitoring
the interest sensitivity position, or gap, which addresses only the magnitude of timing
differences and does not address earnings or market value, management utilizes an earnings
simulation model to prepare, on a regular basis, earnings projections based on a range of interest
rate scenarios to more accurately evaluate the level of risk involved. Off-Balance Sheet Arrangements The Corporations financial statements do not reflect various off-balance sheet arrangements
that may involve some liquidity risk, credit risk and interest rate risk. These commitments consist
mainly of loans approved but not yet funded, unused lines of credit and letters of credit made
under the same standards as on-balance sheet instruments. In addition, on December 18, 2001, the
Company borrowed $4,000,000 of floating rate mandatory redeemable securities through a special
purpose entity as part of a private offering. On September 21, 2004, the Company borrowed an
additional $3,000,000 of floating rate mandatory redeemable securities through a special purpose
entity as part of a private offering. These arrangements are discussed more fully in Note 1,
Summary of Significant Accounting PoliciesOff-Balance Sheet Financial Instruments, and in Note
11, Subordinated Debentures and Other Debt, to the Companys Consolidated Financial Statements
for the years ending December 31, 2004 and 2003. Critical Accounting Policies The accounting principles followed by the Corporation and the methods of applying these
principles conform with United States generally accepted accounting principles and with general
practices within the banking industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Critical accounting
policies relate to investments, loans, allowance for loan losses, intangibles, revenues, expenses,
stock options and income taxes. A description of these policies, which significantly affect the
determination of the financial position, results of operations and cash flows, are summarized in
Note 1, Summary of Significant Accounting Policies in the Notes to Consolidated Financial
Statements and discussed elsewhere in this section. 17




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##### Table of Contents



Results Of Operations 
 Comparison of Years Ended December 31, 2004, and 2003. The Company recorded net income in 2004 of $2,007,000, an increase of 3.4% from 2003 net
income of $1,941,000. Return on average shareholders equity for the years ended December 31, 2004,
and 2003 was 17.3%, and 19.5%. Return on average assets for the years ended December 31, 2004, and
2003 was 1.02%, and 1.08%. The Company invested in the establishment of an additional branch in
Sullivan County during 2004. The branch did not open until late in 2004 and is not projected to
become profitable until late 2005 or early 2006. As will be discussed in more detail in the
following sections, the start up costs as well as increased personnel and operational expenses
impacted the growth of income in 2004. 
 Net Interest Income. Net interest income, the Banks largest single source of earnings, represents the difference
between interest and fees earned on loans, investments, and other earning assets and the interest
paid on deposits and other liabilities obtained to fund them. The net interest margin is this
difference expressed on a taxable equivalent basis as a percentage of average earning assets. The
margin is influenced by a number of factors, such as the volume and mix of earning assets and
funding sources, the interest rate environment and income tax rates. The margin is also affected
by the level of earning assets funded by interest free sources (primarily noninterest-bearing
demand deposits and equity capital). Net interest income increased $545,451 or 8.2% in 2004. Between December 31, 2003 and
December 31, 2004, average earning assets grew approximately $15.2 million or 9.1% while the
average yield on the assets declined from 6.21% at December 31, 2003 to 6.03% at December 31, 2004.
During this same time period, however, the cost of interest bearing liabilities decreased from
2.47% at December 31, 2003 to 2.28% at December 31, 2004. As a result, net interest margin, which
is net interest income expressed as a percentage of average earning assets, remained relatively
flat going from 3.97% at December 31, 2003 to 3.94% at December 31, 2004. Net
interest margin declined approximately 54 basis points in 2003. The Companys net interest
margin has been impacted during the last several years due to reductions in interest rates taken by
the Federal Reserve, as well as the shift in the Companys loan portfolio away from higher yielding
consumer loans to commercial real estate loans. In addition, at the end of 2003, the Company had
$6.6 million of lower yielding fed funds sold outstanding. During 2004, these funds were
reinvested in higher yielding loans and investment securities. The Federal Reserve also began
raising interest rates in June, 2004. Since the Company is asset sensitive, meaning assets reprice
more quickly than liabilities in a rising rate environment, net interest margin did not decline
significantly in 2004 as compared to the prior year. 
 Provision for Loan Losses. In 2004, the Bank recorded a provision of loan losses of $256,600 compared to $487,700 for
2003. The provision for loan losses decreased in 2004 primarily due to lower loan growth during
the twelve months ending December 31, 2004 as compared to the same period in 2003. Managements
determination of the appropriate level of the provision for loan losses and the adequacy of the
allowance for loan losses is based, in part, on an evaluation of specific loans, as well as the
consideration of the Banks historical loss experience. Other factors considered by management
include the composition of the loan portfolio, current and anticipated economic conditions, and the
creditworthiness of the Banks borrowers and other related factors. The provision for loan losses
has been directly impacted by the rapid loan growth experienced by the Bank, as well as the effect
of net charge-offs as the loan portfolio is maturing. Managements allowance calculation supports
the current allowance balance of 1.12% of gross loans. 
 Noninterest Income. Noninterest
income decreased $226,000 or 12.3% in 2004. Non interest income consists mainly of
services charges on deposit accounts, credit life insurance commissions, bank owned life insurance
income and secondary 18




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##### Table of Contents



market mortgage processing fees. Service charges on deposit accounts for 2004 were $1,096,000 as
compared to $1,134,000 for 2003, reflecting a decrease of $38,000. This decrease resulted from
reduced usage by customers of overdraft privileges offered by the Company. Secondary market mortgage processing fees for 2004 were $56,500 as compared to $115,000 in 2003.
In 2003, the Company had two secondary market loan originators. Due to turnover, only one
originator was on staff in 2004. This reduction in personnel, combined with rising mortgage rates
and increased competition in this area resulted in reduced income in 2004. During 2003, $20,000 from gains on the sale of foreclosed property and $105,858 from the sale of
investment securities were recognized. A loss of $6,626 on the sale of investment securities was
incurred in 2004. In 2003, the Company held securities that earned higher than market yields, yet
had relatively short remaining lives. The Company determined that it was more advantageous to sell
the securities and take the gains rather than hold them to maturity. In 2004, due to changes in
the bond market, no additional opportunities to sell at gains occurred. The Company sold certain
securities in 2004 at a small loss in an effort to better position the portfolio for a rising rate
environment. 
 Noninterest Expenses. Noninterest expenses increased during 2004 to $5,400,000 as compared to $4,959,000 in 2003, an
increase of 8.9%. The ratio of noninterest expense as a percentage of average assets was 2.7% for
2004 and 2.8% for 2003. Salaries and employee benefits, which comprise over 50% of total
noninterest expense, increased 5.4% in 2004. Occupancy expense increased by $47,000 or 9.3%. The
Company opened a new branch in Sullivan County in late 2004. The start up expenses as well as
personnel and operational expenses of this branch are a primary component of the increase in non
interest expenses during 2004. Non interest expense in 2004 also includes a $60,000 loss related to a counterfeit official check
received by the Company. While this may be eventually recovered from law enforcement officials, it
appears doubtful at this time and therefore was recognized as a loss. 
 Provision for Income Taxes. The Company records a provision for income taxes currently payable and for taxes payable in
the future because of differences in the timing of recognition of certain items for financial
statement and income tax purposes. The major difference between the effective tax rate applied to
the Companys financial statement income and the federal statutory rate is caused by state income
taxes, net of federal tax benefit. The Companys effective tax rate was 35.7% in 2004, and 35.5%
in 2003. See Note 8 to the Companys consolidated financial statements (in Item 8 of this report)
for additional details of the Companys income tax provision. Distribution, Rate and Yield Analysis of Net Income The following table presents the Companys average balances of earning assets and
interest-bearing liabilities, the amount of interest income and interest expense, the
average yield or rate for each category of interest-earning assets and interest-bearing
liabilities, and the net interest income and the net interest margin for the periods
indicated: 19




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##### Table of Contents



FIRST COMMUNITY CORPORATION
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense The following table shows the consolidated average monthly balances of each principal category of assets,
liabilities and stockholders equity of the Company, and an analysis of net interest revenue, and the change
in interest income and interest expense segregated into amounts attributable to changes in volume and
changes in rates. The table is presented on a taxable equivalent basis (4). In Thousands of dollarsDecember 31, 2004
    
    
    December 31, 2003
    
    
    2004/2003 ChangeAverage
    
    
    Interest
    
    
    Revenue/
    
    
    Average
    
    
    Interest
    
    
    Revenue/
    
    
    Due to
    
    
    Due toBalance
    
    
    Rate
    
    
    Expense
    
    
    Balance
    
    
    Rate
    
    
    Expense
    
    
    Volume
    
    
    Rate (1)
    
    
    TotalGross loans (2,3 and 4)
    
    $
    159,406
    
    
    
    6.46
    %
    
    
    10,295
    
    
    
    143,796
    
    
    
    6.83
    %
    
    
    9,817
    
    
    
    1,066
    
    
    
    (589
    )
    
    
    477Investment securities (4)
    
    
    18,520
    
    
    
    3.20
    %
    
    
    592
    
    
    
    13,473
    
    
    
    3.67
    %
    
    
    494
    
    
    
    185
    
    
    
    (87
    )
    
    
    98Federal funds sold and other
    
    
    4,234
    
    
    
    2.05
    %
    
    
    87
    
    
    
    9,694
    
    
    
    0.66
    %
    
    
    64
    
    
    
    (36
    )
    
    
    59
    
    
    
    23Total interest-earning assets
    
    
    182,160
    
    
    
    6.02
    %
    
    
    10,974
    
    
    
    166,963
    
    
    
    6.21
    %
    
    
    10,375
    
    
    
    1,215
    
    
    
    (616
    )
    
    
    599Cash and due from banks
    
    
    4,771
    
    
    
    
    
    
    
    
    
    
    
    5,076Other assets
    
    
    12,460
    
    
    
    
    
    
    
    
    
    
    
    8,362Allowance for loan losses
    
    
    (1,767
    )
    
    
    
    
    
    
    
    
    
    
    (1,571
    )Total assets
    
    $
    197,624
    
    
    
    
    
    
    
    
    
    
    
    178,830Deposits:NOW and money market investments
    
    $
    29,895
    
    
    
    0.93
    %
    
    
    279
    
    
    
    25,025
    
    
    
    0.97
    %
    
    
    242
    
    
    
    47
    
    
    
    (10
    )
    
    
    37Savings
    
    
    16,408
    
    
    
    0.81
    %
    
    
    132
    
    
    
    16,981
    
    
    
    1.07
    %
    
    
    182
    
    
    
    (6
    )
    
    
    (44
    )
    
    
    (50
    )Time deposit is $100,000 and over
    
    
    40,498
    
    
    
    2.44
    %
    
    
    989
    
    
    
    37,157
    
    
    
    2.60
    %
    
    
    967
    
    
    
    87
    
    
    
    (64
    )
    
    
    23Other time deposits
    
    
    56,148
    
    
    
    2.62
    %
    
    
    1,471
    
    
    
    51,542
    
    
    
    2.95
    %
    
    
    1,521
    
    
    
    136
    
    
    
    (186
    )
    
    
    (50
    )Total interest-bearing deposits
    
    
    142,949
    
    
    
    2.01
    %
    
    
    2,871
    
    
    
    130,705
    
    
    
    2.23
    %
    
    
    2,912
    
    
    
    264
    
    
    
    (304
    )
    
    
    (40
    )Other borrowings
    
    
    23,802
    
    
    
    3.91
    %
    
    
    931
    
    
    
    20,760
    
    
    
    4.03
    %
    
    
    837
    
    
    
    123
    
    
    
    (29
    )
    
    
    94Total interest-bearing liabilities
    
    
    166,751
    
    
    
    2.28
    %
    
    
    3,802
    
    
    
    151,465
    
    
    
    2.48
    %
    
    
    3,749
    
    
    
    387
    
    
    
    (334
    )
    
    
    53Non interest-bearing liabilities
    
    
    19,285
    
    
    
    
    
    
    
    
    
    
    
    17,358
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    186,036
    
    
    
    
    
    
    
    
    
    
    
    168,823Shareholders equity
    
    
    11,588
    
    
    
    
    
    
    
    
    
    
    
    10,007Total liabilities and
shareholders equity
    
    $
    197,624
    
    
    
    
    
    
    
    
    
    
    
    178,830Net interest income
    
    
    
    
    
    
    
    
    
    $
    7,172
    
    
    
    
    
    
    
    
    
    
    $
    6,626
    
    
    
    828
    
    
    
    (282
    )
    
    
    546Net interest margin (5)
    
    
    
    
    
    
    3.94
    %
    
    
    
    
    
    
    
    
    
    
    3.97
    %
   1
    
    Changes in interest income and expense not due solely to balance or rate changes are included in the rate category.2
    
    Interest income includes fees on loans of $653,000 in 2004 and $668,000 in 2003.3
    
    Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest.4
    
    Tax-exempt loans and securities are presented on a taxable equivalent basis.5
    
    Net interest income to average earning assets. 20




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##### Table of Contents



FIRST COMMUNITY CORPORATION
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense The following table shows the consolidated average monthly balances of each principal category of assets,
liabilities and stockholders equity of the Company, and an analysis of net interest revenue, and the change
in interest income and interest expense segregated into amounts attributable to changes in volume and
changes in rates. The table is presented on a taxable equivalent basis (4). In Thousands of dollarsDecember 31, 2003
    
    
    December 31, 2002
    
    
    2003/2002 ChangeAverage
    
    
    Interest
    
    
    Revenue/
    
    
    Average
    
    
    Interest
    
    
    Revenue/
    
    
    Due to
    
    
    Due toBalance
    
    
    Rate
    
    
    Expense
    
    
    Balance
    
    
    Rate
    
    
    Expense
    
    
    Volume
    
    
    Rate (1)
    
    
    TotalGross loans (2,3 and 4)
    
    $
    143,796
    
    
    
    6.83
    %
    
    
    9,817
    
    
    
    115,221
    
    
    
    7.71
    %
    
    
    8,878
    
    
    
    2,202
    
    
    
    (1,263
    )
    
    
    939Investment securities (4)
    
    
    13,473
    
    
    
    3.67
    %
    
    
    494
    
    
    
    12,147
    
    
    
    5.04
    %
    
    
    612
    
    
    
    67
    
    
    
    (185
    )
    
    
    (118
    )Federal funds sold and other
    
    
    9,694
    
    
    
    0.66
    %
    
    
    64
    
    
    
    7,592
    
    
    
    1.49
    %
    
    
    113
    
    
    
    31
    
    
    
    (80
    )
    
    
    (49
    )Total interest-earning assets
    
    
    166,963
    
    
    
    6.21
    %
    
    
    10,375
    
    
    
    134,960
    
    
    
    7.12
    %
    
    
    9,603
    
    
    
    2,300
    
    
    
    (1,528
    )
    
    
    772Cash and due from banks
    
    
    5,076
    
    
    
    
    
    
    
    
    
    
    
    4,877Other assets
    
    
    8,362
    
    
    
    
    
    
    
    
    
    
    
    9,448Allowance for loan losses
    
    
    (1,571
    )
    
    
    
    
    
    
    
    
    
    
    (1,311
    )Total assets
    
    $
    178,830
    
    
    
    
    
    
    
    
    
    
    
    147,974Deposits:NOW and money market investments
    
    $
    25,025
    
    
    
    0.97
    %
    
    
    242
    
    
    
    22,368
    
    
    
    1.29
    %
    
    
    288
    
    
    
    34
    
    
    
    (80
    )
    
    
    (46
    )Savings
    
    
    16,981
    
    
    
    1.07
    %
    
    
    182
    
    
    
    14,626
    
    
    
    1.72
    %
    
    
    251
    
    
    
    40
    
    
    
    (110
    )
    
    
    (70
    )Time deposit is $100,000 and over
    
    
    37,157
    
    
    
    2.60
    %
    
    
    967
    
    
    
    28,719
    
    
    
    2.96
    %
    
    
    849
    
    
    
    249
    
    
    
    (132
    )
    
    
    118Other time deposits
    
    
    51,542
    
    
    
    2.95
    %
    
    
    1,521
    
    
    
    38,132
    
    
    
    3.36
    %
    
    
    1,280
    
    
    
    450
    
    
    
    (209
    )
    
    
    241Total interest-bearing deposits
    
    
    130,705
    
    
    
    2.23
    %
    
    
    2,912
    
    
    
    103,845
    
    
    
    2.57
    %
    
    
    2,668
    
    
    
    773
    
    
    
    (530
    )
    
    
    243Other borrowings
    
    
    20,760
    
    
    
    4.03
    %
    
    
    837
    
    
    
    18,893
    
    
    
    4.47
    %
    
    
    844
    
    
    
    83
    
    
    
    (90
    )
    
    
    (7
    )Total interest-bearing liabilities
    
    
    151,465
    
    
    
    2.48
    %
    
    
    3,749
    
    
    
    122,738
    
    
    
    2.86
    %
    
    
    3,512
    
    
    
    856
    
    
    
    (619
    )
    
    
    237Non interest-bearing liabilities
    
    
    17,358
    
    
    
    
    
    
    
    
    
    
    
    15,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    168,823
    
    
    
    
    
    
    
    
    
    
    
    138,638Shareholders equity
    
    
    10,007
    
    
    
    
    
    
    
    
    
    
    
    9,336Total liabilities and
shareholders equity
    
    $
    178,830
    
    
    
    
    
    
    
    
    
    
    
    147,974Net interest income
    
    
    
    
    
    
    
    
    
    $
    6,626
    
    
    
    
    
    
    
    
    
    
    $
    6,091
    
    
    
    1,444
    
    
    
    (909
    )
    
    
    535Net interest margin (5)
    
    
    
    
    
    
    3.97
    %
    
    
    
    
    
    
    
    
    
    
    4.51
    %
 21




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##### Table of Contents



Investment Portfolio The carrying value of securities at December 31 is summarized as follows: Category December 312004
    
    
    2003($ in thousands)Available for sale:U.S. Government securities
    
    $
    4,802
    
    
    $
    999Mortgage-backed
    
    
    9,104
    
    
    
    11,371Tax exempt
    
    
    1,785
    
    
    
    2,145Total
    
    $
    15,691
    
    
    $
    14,515
 The following table presents the carrying value by maturity distribution of debt
securities along with weighted average yields thereon as of December 31, 2004: Within
    
    
    1-5
    
    
    Beyond($ in thousands)
    
    1 Year
    
    
    Years
    
    
    5 Years
    
    
    TotalU.S. Government securities
    
    $
    
    
    
    $
    4,677
    
    
    $
    125
    
    
    $
    4,802Tax exempt securities
    
    
    
    
    
    
    
    
    
    
    1,785
    
    
    
    1,785$
    
    
    
    $
    4,677
    
    
    $
    1,910
    
    
    $
    6,587Weighted average yield (tax equivalent)
    
    
    0
    %
    
    
    3.38
    %
    
    
    4.96
    %
    
    
    3.84
    %Mortgage-backed
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,104Weighted average yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.87
    %
 Loan Portfolio The following table presents various categories of loans contained in the Banks loan
portfolio for the periods indicated and the total amount of all loans for such period: 2004
    
    
    2003($ in thousands)Domestic:Commercial, financial and agricultural
    
    $
    22,664
    
    
    $
    21,014Real estate
 construction
    
    
    20,191
    
    
    
    20,202Real estate  1 to 4 family residential
    
    
    44,196
    
    
    
    46,105Real estate
 other
    
    
    76,056
    
    
    
    59,955Consumer loans
    
    
    4,843
    
    
    
    6,036Total loans
    
    $
    167,950
    
    
    $
    153,312Allowance for loan losses
    
    
    (1,879
    )
    
    
    (1,736
    )Total (net of allowance)
    
    $
    166,071
    
    
    $
    151,576
 The following is a presentation of an analysis of maturities of loans as of December 31, 2004: Due in 1
    
    
    Due in 1
    
    
    Due afterType of Loan
    
    year or less
    
    
    to 5 years
    
    
    5 Years
    
    
    Total($ in thousands)Commercial, financial and agricultural
    
    $
    10,578
    
    
    $
    9,151
    
    
    $
    2,935
    
    
    $
    22,664Real estate-construction
    
    
    12,236
    
    
    
    4,147
    
    
    
    3,808
    
    
    
    20,191Total
    
    $
    22,814
    
    
    $
    13,298
    
    
    $
    6,743
    
    
    $
    42,855
 22




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##### Table of Contents



Loan Portfolio(Continued) The following is a presentation of an analysis of sensitivities of loans to changes in
interest rates as of December 31, 2004 (in thousands): Loans due after 1 year with predetermined interest rates
    
    $
    7,695Loans due after 1 year with floating interest rates
    
    $
    12,346
 The following table presents information regarding nonaccrual, past due and
restructured loans at the dates indicated: December 31,2004
    
    
    2003Loans accounted for on a non-accrual basis:Number
    
    
    1
    
    
    
    5Amount
    
    $
    17,000
    
    
    $
    227,000Accruing loans (including consumer loans) which are
contractually past due 90 days or more as to principal
and interest payments:Number
    
    
    1
    
    
    
    1Amount
    
    $
    45,000
    
    
    $
    33,000Loans defined as troubled debt restructuringsNumber
    
    
    0
    
    
    
    0Amount
    
    $
    0
    
    
    $
    0
 Management has internally classified an additional $1.8 million in loans as substandard
based upon other possible credit problems. These loans are not included in the above
amounts. These loans are performing loans but are classified as substandard due to payment
history, decline in the borrowers financial position or decline in collateral value. Loans
classified as substandard are inadequately protected by the current
sound net worth and paying
capacity of the obligor or the collateral pledged, if any. Loans so classified must have a
well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans
classified as doubtful have all the weaknesses inherent in one classified substandard, with
the added characteristic that the weaknesses make collection or liquidation in full, on the
basis of currently existing facts, conditions and values, highly questionable and
improbable. Loans classified as loss are considered uncollectible and of such little value
that their continuance as bankable assets is not warranted. There were no loans classified
as doubtful or loss as of December 31, 2004. As of December 31, 2004, there are no loans classified for regulatory purposes as
doubtful or substandard that have not been disclosed in the above table, which (i) represent
or result from trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or (ii) represent material
credits about which management is aware of any information which causes management to have
serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Accrual of interest is discontinued on a loan when principal and/or interest has not
been paid for 90 days, unless the loan is well secured and in the process of collection.
In the process of collection means that a definitive source should pay the loan in full
within 30 days. There are no other loans which are not disclosed above, but where known information
about possible credit problems of borrowers causes management to have serious doubts as to
the ability of such borrowers to comply with the present loan repayment terms. 23




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##### Table of Contents



Summary of Loan Loss Experience An analysis of the Banks loss experience is furnished in the following table for the
periods indicated, as well as a breakdown of the allowance for possible loan losses (in
thousands): Years ended December 31,2004
    
    
    2003Balance at beginning of period
    
    $
    1,736
    
    
    $
    1,351Charge-offs: Real estate
    
    
    (78
    )
    
    
    (33
    )Consumer
    
    
    (77
    )
    
    
    (93
    )(155
    )
    
    
    (126
    )Recoveries
    
    
    41
    
    
    
    23Net Charge-offs
    
    
    (114
    )
    
    
    (103
    )Additions charged to operations
    
    
    257
    
    
    
    488Balance at end of period
    
    $
    1,879
    
    
    $
    1,736Ratio of net charge-offs during the period to
average loans outstanding during the period
    
    
    .07
    %
    
    
    .07
    %
 At December 31, 2004 and 2003 the allowance was allocated as follows ($in thousands): 2004
    
    
    2003Percentage of
    
    
    
    
    
    
    Percentage ofloans in each
    
    
    
    
    
    
    loans in eachcategory to
    
    
    
    
    
    
    category toAmount
    
    
    total loans
    
    
    Amount
    
    
    total loansCommercial, financial and agricultural
    
    $
    78
    
    
    
    14
    %
    
    $
    72
    
    
    
    12
    %Real estate-construction
    
    
    313
    
    
    
    12
    %
    
    
    289
    
    
    
    14
    %Real estate-mortgage
    
    
    317
    
    
    
    26
    %
    
    
    293
    
    
    
    30
    %Real estate-other
    
    
    469
    
    
    
    45
    %
    
    
    433
    
    
    
    40
    %Consumer loans
    
    
    702
    
    
    
    3
    %
    
    
    649
    
    
    
    4
    %Total
    
    $
    1,879
    
    
    
    100
    %
    
    $
    1,736
    
    
    
    100
    %
 Allowance For Loan Losses In considering the adequacy of the Companys allowance for loan losses, management has
focused on the fact that as of December 31, 2004, 69.61% of outstanding loans are in the
category of commercial loans and commercial real estate loans. Commercial loans are
generally considered by management as having greater risk than other categories of loans in
the Companys loan portfolio. However, approximately 90% of these commercial loans at
December 31, 2004, were made on a secured basis. Management believes that the secured
condition of the preponderant portion of its commercial loan portfolio greatly reduces any
risk of loss inherently present in commercial loans. The Companys consumer loan portfolio is also well secured, and as such, does not, in
managements opinion involve more than normal credit risk. The same is true for the
Companys real estate mortgage portfolio, approximately 90% of which is secured by first
mortgages on 1-4 family residential properties. 24




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##### Table of Contents



Although the Companys loan portfolio is concentrated in upper East Tennessee,
primarily Hawkins and Sullivan counties, management does not believe this geographic
concentration presents an abnormally high risk. Deposits The following tables present, for the periods indicated, the average amount of and
average rate paid on each of the following deposit categories ($ in thousands): Years Ended December 31,2004
    
    
    2003Average
    
    
    
    
    
    
    AverageAverage
    
    
    Rate
    
    
    Average
    
    
    RateAmount
    
    
    Paid
    
    
    Amount
    
    
    PaidNoninterest-bearing
    
    $
    18,191
    
    
    Not applicable
    
    $
    6,256
    
    
    Not applicableInterest-bearing demand
    
    
    29,895
    
    
    
    0.93
    %
    
    
    25,025
    
    
    
    0.97
    %Savings
    
    
    16,408
    
    
    
    0.81
    %
    
    
    16,981
    
    
    
    1.07
    %Certificates of deposits
    
    
    96,646
    
    
    
    2.55
    %
    
    
    88,699
    
    
    
    2.81
    %
 The following table indicates amount outstanding of time certificates of deposit of
$100,000 or more and respective maturities for the year ended December 31, 2004 (in
thousands): Certificates of Deposit3 months or less
    
    $
    13,3123-12 months
    
    
    11,023over 12 months
    
    
    13,355Total
    
    $
    37,690
 Return on Equity and Assets Returns on average consolidated assets and average consolidated equity for the periods
indicated are as follows: Years ended December 31,2004
    
    
    2003Return on average assets
    
    
    1.0
    %
    
    
    1.1
    %Return on average equity
    
    
    17.3
    %
    
    
    19.5
    %Average equity to average assets ratio
    
    
    5.9
    %
    
    
    5.5
    %Dividend payout ratio
    
    
    26.7
    %
    
    
    27.1
    %
 25




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##### Table of Contents



Short-Term Borrowings The following table summarizes short-term borrowings (securities sold under agreements
to repurchase) at December 31, 2004 and 2003: ($ in thousands)2004
    
    
    2003Amount outstanding at December 31
    
    $
    1,434
    
    
    $
    1,920Weighted average interest rate at year end
    
    
    1.31
    %
    
    
    0.66
    %Maximum month-end balance during the year
    
    
    2,700
    
    
    
    3,186Average amount outstanding during the year
    
    
    2,102
    
    
    
    2,497Weighted average interest rate during the year
    
    
    0.86
    %
    
    
    0.95
    %
 26




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##### Table of Contents



ITEM 7. Financial Statements The following financial statements and reports of independent auditors are included herein: Reports of Independent Registered Public Accounting FirmConsolidated Balance Sheets, December 31, 2004 and 2003Consolidated Statements of Operations, YearsEnded December 31, 2004 and 2003Consolidated Statements of Changes in Shareholders Equity, YearsEnded December 31, 2004 and 2003Consolidated Statements of Cash Flows, YearsEnded December 31, 2004 and 2003
 Notes to Consolidated Financial Statements, December 31, 2004 and 2003 27




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##### Table of Contents



FIRST COMMUNITY CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
Rogersville, Tennessee CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003 CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-1CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS
    
    
    F-2CONSOLIDATED STATEMENTS OF OPERATIONS
    
    
    F-3CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
    
    
    F-4CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    F-5NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-6




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors
First Community Corporation
Rogersville, Tennessee We have audited the consolidated balance sheets of First Community Corporation as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in shareholders equity, and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Corporation as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Crowe Chizek and Company LLCBrentwood, TennesseeFebruary 25, 2005
 F-1.




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##### Table of Contents



FIRST COMMUNITY CORPORATION 
 CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003
  
 2004
    
    
    2003ASSETSCash and due from banks
    
    $
    5,163,142
    
    
    $
    2,763,862Federal funds sold
    
    
    
    
    
    
    6,572,235Cash and cash equivalents
    
    
    5,163,142
    
    
    
    9,336,097Securities available for sale
    
    
    15,690,735
    
    
    
    14,515,480Loans, net (of allowance of $1,878,663 and $1,735,980)
    
    
    166,071,100
    
    
    
    151,576,009Premises and equipment
    
    
    7,161,826
    
    
    
    5,843,051Accrued interest receivable
    
    
    1,066,616
    
    
    
    1,154,997Restricted equity securities
    
    
    1,641,315
    
    
    
    1,578,615Company owned life insurance
    
    
    3,635,771
    
    
    
    3,473,943Computer software, net of amortization
    
    
    451,246
    
    
    
    449,170Other assets
    
    
    1,239,422
    
    
    
    826,978$
    202,121,173
    
    
    $
    188,754,340LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesDepositsNoninterest-bearing
    
    $
    16,337,136
    
    
    $
    16,363,536Interest-bearing
    
    
    143,970,635
    
    
    
    141,861,832Total deposits
    
    
    160,307,771
    
    
    
    158,225,368Securities sold under agreement to repurchase
    
    
    1,433,909
    
    
    
    1,920,416Federal Home Loan Bank advances
    
    
    19,010,000
    
    
    
    12,000,000Subordinated debentures
    
    
    7,000,000
    
    
    
    4,000,000Note payable
    
    
    
    
    
    
    350,000Accrued interest payable
    
    
    598,897
    
    
    
    567,664Dividends payable
    
    
    133,823
    
    
    
    132,366Other liabilities
    
    
    1,319,035
    
    
    
    914,721Total liabilities
    
    
    189,803,435
    
    
    
    178,110,535Shareholders equityPreferred stock, no par value. Authorized 1,000,000
shares; none issued
    
    
    
    
    
    
    Common stock, no par value. Authorized 10,000,000
shares; issued 1,911,760 shares in 2004 and 1,890,945
shares in 2003
    
    
    7,388,328
    
    
    
    7,182,967Retained earnings
    
    
    5,002,184
    
    
    
    3,530,093Accumulated other comprehensive loss
    
    
    (72,774
    )
    
    
    (69,255
    )Total shareholders equity
    
    
    12,317,738
    
    
    
    10,643,805$
    202,121,173
    
    
    $
    188,754,340
   See accompanying notes to consolidated financial statements. F-2.




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##### Table of Contents



FIRST COMMUNITY CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2004 and 2003
   2004
    
    
    2003Interest incomeLoans, including fees
    
    $
    10,294,789
    
    
    $
    9,817,400SecuritiesTaxable
    
    
    519,900
    
    
    
    376,477Non-taxable
    
    
    72,618
    
    
    
    59,349Federal funds sold and other
    
    
    86,898
    
    
    
    122,504Total interest income
    
    
    10,974,205
    
    
    
    10,375,730Interest expenseDeposits
    
    
    2,871,253
    
    
    
    2,912,126Federal Home Loan Bank advances
    
    
    643,798
    
    
    
    591,708Subordinated debentures
    
    
    250,418
    
    
    
    201,595Other
    
    
    36,305
    
    
    
    43,321Total interest expense
    
    
    3,801,774
    
    
    
    3,748,750Net interest income
    
    
    7,172,431
    
    
    
    6,626,980Provision for loan losses
    
    
    256,625
    
    
    
    487,747Net interest income after provision for loan losses
    
    
    6,915,806
    
    
    
    6,139,233Noninterest incomeService charges on deposit accounts
    
    
    1,096,017
    
    
    
    1,134,055Mortgage banking activities
    
    
    56,452
    
    
    
    114,660Net gain (loss) on sale of securites
    
    
    (6,626
    )
    
    
    105,858Other
    
    
    457,802
    
    
    
    475,201Total noninterest income
    
    
    1,603,645
    
    
    
    1,829,774Noninterest expenseSalaries and employee benefits
    
    
    2,711,384
    
    
    
    2,572,392Occupancy
    
    
    552,575
    
    
    
    505,920Furniture and equipment
    
    
    392,074
    
    
    
    413,633Advertising and public relations
    
    
    102,466
    
    
    
    66,701Professional services
    
    
    207,407
    
    
    
    178,254Operating supplies
    
    
    120,996
    
    
    
    126,444Computer software depreciation
    
    
    148,656
    
    
    
    109,635Software maintenance
    
    
    121,385
    
    
    
    97,749Telephone and data communications
    
    
    110,436
    
    
    
    105,528Director and committee fees
    
    
    119,700
    
    
    
    120,600Other
    
    
    813,137
    
    
    
    662,220Total noninterest expense
    
    
    5,400,216
    
    
    
    4,959,076Income before income taxes
    
    
    3,119,235
    
    
    
    3,009,931Income tax expense
    
    
    1,112,523
    
    
    
    1,068,974Net income
    
    $
    2,006,712
    
    
    $
    1,940,957Earnings per common shareBasic
    
    $
    1.05
    
    
    $
    1.03Diluted
    
    
    1.05
    
    
    
    1.03Average common shares outstandingBasic
    
    
    1,905,616
    
    
    
    1,881,269Diluted
    
    
    1,918,112
    
    
    
    1,888,869
   See accompanying notes to consolidated financial statements. F-3.




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##### Table of Contents



FIRST COMMUNITY CORPORATION 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 Years ended December 31, 2004 and 2003
   AccumulatedOther
    
    
    TotalCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Stock
    
    
    Earnings
    
    
    Loss
    
    
    EquityBalance, January 1, 2003
    
    
    1,871,755
    
    
    $
    6,984,371
    
    
    $
    2,116,734
    
    
    $
    136,093
    
    
    $
    9,237,198Issuance of 19,190 common stock in
connection with stock option plans
and stock grants
    
    
    19,190
    
    
    
    198,596
    
    
    
    
    
    
    
    
    
    
    
    198,596Dividends  $.28 per share
    
    
    
    
    
    
    
    
    
    
    (527,598
    )
    
    
    
    
    
    
    (527,598
    )Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    1,940,957
    
    
    
    
    
    
    
    1,940,957Other comprehensive incomeChange in unrealized losses on
Securities available for sale,
net of reclassification
and tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (139,716
    )
    
    
    (139,716
    )Reclassification adjustment for
gains included in net income,
net of taxes of $40,226
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,632
    )
    
    
    (65,632
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,735,609Balance, December 31, 2003
    
    
    1,890,945
    
    
    
    7,182,967
    
    
    
    3,530,093
    
    
    
    (69,255
    )
    
    
    10,643,805Issuance of 20,815 common stock in
connection with stock option plans
and stock grants
    
    
    20,815
    
    
    
    205,361
    
    
    
    
    
    
    
    
    
    
    
    205,361Dividends  $.28 per share
    
    
    
    
    
    
    
    
    
    
    (534,621
    )
    
    
    
    
    
    
    (534,621
    )Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    2,006,712
    
    
    
    
    
    
    
    2,006,712Other comprehensive incomeChange in unrealized losses on
securities available for sale,
net of reclassification
and tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,627
    )
    
    
    (7,627
    )Reclassification adjustment for
losses included in net income,
net of taxes of $2,518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,108
    
    
    
    4,108Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,003,193Balance, December 31, 2004
    
    
    1,911,760
    
    
    $
    7,388,328
    
    
    $
    5,002,184
    
    
    $
    (72,774
    )
    
    $
    12,317,738
   See accompanying notes to consolidated financial statements. F-4.




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##### Table of Contents



FIRST COMMUNITY CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004 and 2003
 2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    2,006,712
    
    
    $
    1,940,957Adjustments to reconcile net income to net
cash provided by operating activitiesDepreciation and amortization
    
    
    646,679
    
    
    
    611,109Net amortization (accretion) of securities
    
    
    183,935
    
    
    
    159,850Provision for loan losses
    
    
    256,625
    
    
    
    487,747FHLB stock dividends
    
    
    (62,700
    )
    
    
    (58,400
    )Net realized loss(gain) on sales of securities
    
    
    6,626
    
    
    
    (105,858
    )Loss on sale of real estate owned, net
    
    
    3,869
    
    
    
    490Deferred income taxes (benefits)
    
    
    (99,289
    )
    
    
    (211,000
    )Tax benefit of stock option exercise
    
    
    91,074
    
    
    
    125,375Change in accrued interest receivable and other assets
    
    
    (442,529
    )
    
    
    83,162Change in accrued interest payable and other liabilities
    
    
    433,485
    
    
    
    (181,102
    )Net cash from operating activities
    
    
    3,024,487
    
    
    
    2,852,330Cash flows from investing activities:Purchases of securities available for sale
    
    
    (13,994,706
    )
    
    
    (16,526,759
    )Proceeds from maturities and redemptions of
securities available for sale
    
    
    6,549,586
    
    
    
    7,671,522Proceeds from sales of securities available for sale
    
    
    6,085,930
    
    
    
    2,944,659Net increase in loans
    
    
    (14,751,716
    )
    
    
    (29,026,362
    )Proceeds from the sale of other real estate
    
    
    45,431
    
    
    
    144,374Purchases of fixed assets and computer software
    
    
    (1,967,530
    )
    
    
    (386,320
    )Net cash from investing activities
    
    
    (18,033,005
    )
    
    
    (35,178,886
    )Cash flows from financing activities:Cash dividends
    
    
    (534,621
    )
    
    
    (526,255
    )Repayments of note payable
    
    
    (350,000
    )
    
    
    (453,000
    )Proceeds from FHLB advances
    
    
    34,513,000
    
    
    
    13,170,000Repayments from FHLB advances
    
    
    (27,503,000
    )
    
    
    (13,170,000
    )Proceeds from subordinated debentures
    
    
    3,000,000
    
    
    
    Increase in deposits
    
    
    2,082,403
    
    
    
    22,052,039Decrease in securities sold under
agreement to repurchase
    
    
    (486,507
    )
    
    
    (452,397
    )Proceeds from issuance of common stock
    
    
    114,288
    
    
    
    73,221Net cash from financing activities
    
    
    10,835,563
    
    
    
    20,693,608Net change in cash and cash equivalents
    
    
    (4,172,955
    )
    
    
    (11,632,948
    )Cash and cash equivalents at beginning of period
    
    
    9,336,097
    
    
    
    20,969,045Cash and cash equivalents at end of period
    
    $
    5,163,142
    
    
    $
    9,336,097Supplemental disclosures of cash flow information:Cash paid during year for:Interest
    
    $
    3,770,541
    
    
    $
    3,507,498Income taxes
    
    
    1,373,425
    
    
    
    1,114,845Supplemental noncash disclosures:Transfers from loans to repossessed assets
    
    
    247,519
    
    
    
    128,918
   See accompanying notes to consolidated financial statements. F-5.




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##### Table of Contents



FIRST COMMUNITY CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2004 and 2003
   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General: First Community Corporation (the Company), through its subsidiary, First
Community Bank (the Bank), provides a variety of banking services to individuals and businesses
from its banking offices in Rogersville, Church Hill, and Kingsport, Tennessee. Its primary
deposit products are demand and savings deposits and certificates of deposit, and its primary
lending products are commercial, residential real estate and consumer loans. The accounting
principles followed and the methods of applying those principles conform with generally accepted
accounting principles and to general practices in the banking industry. The significant policies
are summarized as follows: Basis of Presentation: The accompanying consolidated financial statements include the
accounts of First Community Corporation, a one-bank holding company and its wholly-owned subsidiary
First Community Bank of East Tennessee, together referred to as the Company. All material
intercompany balances and transactions have been eliminated in consolidation. The Bank operates as
a single segment. Use of Estimates: To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could differ. The allowance
for loan losses, fair values of financial instruments, and deferred compensation in retirement plan
liabilities are particularly subject to change. Cash Flows: Cash and cash equivalents includes cash, deposits with other financial
institutions under 90 days, and federal funds sold. Net cash flows are reported for loan, deposit
and securities sold under agreements to repurchase transactions. Cash and Due From Banks: Included in cash and due from banks are legal reserve
requirements which must be maintained on an average basis in the form of cash and balances due from
the Federal Reserve and other banks. Cash on hand or on deposit with correspondent banks of
$767,000 and $637,000 was required to meet regulatory reserve and clearing requirements at year end
2004 and 2003. These balances do not earn interest. Securities: Securities are classified as held to maturity and carried at amortized cost
when management has the positive intent and ability to hold them to maturity. Securities are
classified as available for sale when they might be sold before maturity. Securities available for
sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income. Other securities such as Federal Home Loan Bank and Bankers Bank stock are
carried at cost. Interest income includes amortization of purchase premium or discount. Gains and losses on sales
are based on the amortized cost of the security sold. Securities are written down to fair value
when a decline in fair value is not temporary. Declines in the fair value of securities below their cost that are other than temporary are
reflected as realized losses. In estimating other-than-temporary losses, management considers: (1)
the length of time and extent that fair value has been less that cost, (2) the financial condition
and near term prospects of the issuer, and (3) the Companys ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in the fair value.   (Continued) F-6.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Loans: Loans that management has the intent and ability to hold for the foreseeable future
or until maturity or payoff are reported at the principal balance outstanding, net of an allowance
for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan
fees and costs over the loan term. Interest income on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier
date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual is reversed against interest
income. Interest received on such loans is accounted for on the cash-basis or cost-recovery
method, until qualifying for return to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future payments are
reasonably assured. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for
probable incurred credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other factors. Allocations of
the allowance may be made for specific loans, but the entire allowance is available for any loan
that, in managements judgment, should be charged-off. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed. A loan is impaired when full payment under the loan terms is not expected. Commercial and
commercial real estate loans that meet certain size and performance characteristics are
individually evaluated for impairment. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated future cash flows
using the loans existing rate or at the fair value of collateral if repayment is expected solely
from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and
residential real estate loans, are collectively evaluated for impairment, and accordingly, they are
not separately identified for impairment disclosures. Premises and Equipment: Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation is computed principally on the
straight-line method over the estimated useful lives of the assets, which range as follows:
building-40 years, equipment-5 to 7 years. Computer Software is amortized using the straight-line
method over the useful life of the asset and ranges from 3 to 5 years. Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If fair value declines in
subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after
acquisition are expensed. Company Owned Life Insurance: The Company has purchased life insurance policies on certain
key executives. Company owned life insurance is recorded at its cash surrender value, or the
amount that can be realized. Long-term Assets: Premises and equipment and other long-term assets are reviewed for
impairment when events indicate their carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at fair value.   (Continued) F-7.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Securities Sold Under Agreement To Repurchase: Substantially all repurchase agreement
liabilities represent amounts advanced by various customers. Securities are pledged to cover these
liabilities, which are not covered by federal deposit insurance. Stock-Based Compensation: Employee compensation expense under stock options is reported
using the intrinsic value method. No stock-based compensation cost is reflected in net income, as
all options granted had an exercise price equal to or greater than the market price of the
underlying common stock at date of grant. The following table illustrates the effect on net income
and earnings per share if expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation. 2004
    
    
    2003Net income as reported
    
    $
    2,006,712
    
    
    $
    1,940,957Deduct: Stock-based compensation expense determined
under fair value based method, net of tax
    
    
    49,055
    
    
    
    5,958Pro forma net income
    
    
    1,957,657
    
    
    
    1,934,999Basic earnings per share as reported
    
    
    1.05
    
    
    
    1.03Pro forma basic earnings per share
    
    
    1.03
    
    
    
    1.02Diluted earnings per share as reported
    
    
    1.05
    
    
    
    1.03Pro forma diluted earnings per share
    
    
    1.02
    
    
    
    1.02
 There were 32,000 options granted to senior management in 2004. No options were granted in 2003. The fair value of option granted and pro forma effects are computed using option pricing models,
using the following weighted-average assumptions as of grant date. 2004Riskfree interest rate
    
    
    3.52
    %Expected option life
    
    7 yearsDividend yield
    
    
    1.87
    %Weighted average fair value of options
granted during year
    
    $
    2.71
 Earnings Per Common Share: Basic earnings per common share is net income divided by the
weighted average number of common shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of additional potential common shares issuable under
stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue
of the financial statements. Income Taxes: Income tax expense is the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be realized.   (Continued) F-8.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Employee Benefits: The Bank maintains a 401(k) profit-sharing plan that covers
substantially all employees. The Bank matches a portion of the employees contribution and records
the expense in the period the employee contribution is withheld. The company has a non-qualified
deferred compensation arrangement with certain current and former officers. A present value based
charge is made each year based on future benefits to be paid under the arrangement. Comprehensive Income: Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on securities available
for sale which are also recognized as separate components of equity. Fair Value of Financial Instruments: Fair values of financial instruments are estimated
using relevant market information and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market conditions could significantly
affect the estimates. Off-Balance Sheet Financial Instruments: Financial instruments include off-balance sheet
credit instruments, such as commitments to make loans and standby letters of credit, issued to meet
customer financing needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial instruments are recorded when
they are funded. Newly Issued But Not Yet Effective Accounting Standards: At December 31, 2004, the
recently issued but not adopted standards are FASB Statement 123, Revised(FAS 123R), Share-based
Paymentand Statement of Position 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities
Acquired in a Transfer. The effect of FAS123R will depend on the number and fair value of stock
options granted in the future. The effect of SOP 03-3 on the Companys financial position and
results of operations is not expected to be material upon and after adoption. Reclassifications: Some items in the prior year financial statements were reclassified to
conform to the current presentation. NOTE 2  SECURITIES The fair values of securities available for sale and the related gross unrealized gains and losses
recognized in accumulated other comprehensive income were as follows: Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    UnrealizedValue
    
    
    Gains
    
    
    Loss2004U.S. Government agency securities
    
    $
    4,801,638
    
    
    $
    2,328
    
    
    $
    (20,076
    )Mortgage-backed securities
    
    
    9,104,182
    
    
    
    18,501
    
    
    
    (103,684
    )Tax exempt securities
    
    
    1,784,915
    
    
    
    13,572
    
    
    
    (28,571
    )Total
    
    $
    15,690,735
    
    
    $
    34,402
    
    
    $
    (152,331
    )
   (Continued) F-9.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003   NOTE 2  SECURITIES(continued) Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    UnrealizedValue
    
    
    Gains
    
    
    Loss2003U.S. Government agency securities
    
    $
    999,500
    
    
    $
    
    
    
    $
    (313
    )Mortgage-backed securities
    
    
    11,371,186
    
    
    
    11,338
    
    
    
    (133,803
    )Tax exempt securities
    
    
    2,144,794
    
    
    
    27,380
    
    
    
    (16,828
    )Total
    
    $
    14,515,480
    
    
    $
    38,718
    
    
    $
    (150,944
    )
 The fair value of securities at December 31, 2004, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers may have the right to
call or prepay obligations. Fair ValueDue after one through five years
    
    $
    4,676,403Due after five through ten years
    
    
    981,470Due after ten years
    
    
    928,680Mortgage-backed securities
    
    
    9,104,182Total
    
    $
    15,690,735
 In 2004, the Company recognized $ 13,291 in gross gains and $ 19,917 in gross losses from the sale
of investment securities. In 2003, the Company recognized $ 105,858 in gross gains from the sale
of investment securities. Securities pledged at year-end 2004 and 2003 had a carrying amount of $15,630,000 and $7,565,000
and were pledged to secure public deposits and repurchase agreements. The following table shows securities with unrealized losses and their fair value, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position at December 31, 2004 and 2003: Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized2004
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU.S. Government
agency securities
    
    $
    3,999,924
    
    
    $
    (20,076
    )
    
    $
    
    
    
    $
    
    
    
    $
    3,994,924
    
    
    $
    (20,076
    )Mortgage-backed securities
    
    
    1,753,292
    
    
    
    (19,725
    )
    
    
    5,788,440
    
    
    
    (83,960
    )
    
    
    7,541,732
    
    
    
    (103,685
    )Tax exempt securities
    
    
    648,362
    
    
    
    (14,636
    )
    
    
    389,133
    
    
    
    (13,935
    )
    
    
    1,037,495
    
    
    
    (28,571
    )Total temporarily impaired
    
    $
    6,401,578
    
    
    $
    (54,436
    )
    
    $
    6,177,573
    
    
    $
    (97,895
    )
    
    $
    12,579,151
    
    
    $
    (152,331
    )2003U.S. Government
agency securities
    
    $
    999,500
    
    
    $
    (313
    )
    
    $
    
    
    
    $
    
    
    
    $
    999,500
    
    
    $
    (313
    )Mortgage-backed securities
    
    
    9,040,389
    
    
    
    (133,803
    )
    
    
    
    
    
    
    
    
    
    
    9,040,389
    
    
    
    (133,803
    )Tax exempt securities
    
    
    575,240
    
    
    
    (16,828
    )
    
    
    
    
    
    
    
    
    
    
    575,240
    
    
    
    (16,828
    )Total temporarily impaired
    
    $
    10,615,129
    
    
    $
    (150,944
    )
    
    $
    
    
    
    $
    
    
    
    $
    10,615,129
    
    
    $
    (150,944
    )
   (Continued) F-10.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 2  SECURITIES(continued) Unrealized losses on securities have not been recognized into income because the issuer(s)
securities are of high credit quality (rated A3 or higher), management has the intent and ability
to hold for the foreseeable future, and the decline in fair value is largely due to increases in
market interest rates. The fair value is expected to recover as the security(s) approach their
maturity date and/or market rates decline. NOTE 3  LOANS A summary of loans outstanding by category at December 31, 2004 and 2003 follows: 2004
    
    
    2003Commercial, financial and agricultural
    
    $
    22,663,554
    
    
    $
    21,013,961Real estate  construction
    
    
    20,190,814
    
    
    
    20,202,457Real estate  1 to 4 family residential properties
    
    
    44,196,362
    
    
    
    46,104,920Real estate
 other
    
    
    76,056,034
    
    
    
    59,955,073Consumer
    
    
    4,842,999
    
    
    
    6,035,579167,949,763
    
    
    
    153,311,989Less: Allowance for loan losses
    
    
    (1,878,663
    )
    
    
    (1,735,980
    )Loans, net
    
    $
    166,071,100
    
    
    $
    151,576,009
 Non performing loan were as follows: 2004
    
    
    2003Loans past due over 90 days still on accrual
    
    $
    45,000
    
    
    $
    33,000Non accrual loans
    
    
    17,000
    
    
    
    227,000
 At December 31, 2004 and 2003, the Bank had loans amounting to $17,000 and $227,000, respectively
that were specifically classified as impaired. The allowance for loan losses related to impaired
loans amounted to approximately $3,000 and $34,000 at December 31, 2004 and 2003, respectively.
The average balance of these loans amounted to approximately $42,000 and $156,000 for the years ended December
31, 2004 and 2003. The impact on interest income of these loans was not significant to the Banks
results of operations. NOTE 4  ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses are as follows: 2004
    
    
    2003Balance at beginning of period
    
    $
    1,735,980
    
    
    $
    1,350,662Provision for loan losses
    
    
    256,625
    
    
    
    487,747Loans charged off
    
    
    (154,528
    )
    
    
    (125,814
    )Recoveries
    
    
    40,586
    
    
    
    23,385Balance at end of period
    
    $
    1,878,663
    
    
    $
    1,735,980
   (Continued) F-11.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 5  PREMISES AND EQUIPMENT Following is a summary of premises and equipment at December 31: 2004
    
    
    2003Land
    
    $
    1,344,742
    
    
    $
    838,092Building
    
    
    6,237,769
    
    
    
    5,376,400Furniture and equipment
    
    
    2,803,797
    
    
    
    2,355,02610,386,308
    
    
    
    8,569,518Less: Accumulated depreciation
    
    
    3,224,482
    
    
    
    2,726,467$
    7,161,826
    
    
    $
    5,843,051
 Depreciation expense totaled $498,015 and $502,790 for 2004 and 2003. Following is a summary of computer software at December 31: 2004
    
    
    2003Computer software
    
    $
    1,195,426
    
    
    $
    1,045,245Less: Accumulated amortization
    
    
    744,180
    
    
    
    596,075$
    451,246
    
    
    $
    449,170
 Amortization expense totaled $148,105 and $109,635 for 2004 and 2003. The Bank leases space for one of its branches under an operating lease. Rental expense was $25,800
and $25,800 for 2004 and 2003. Annual rent commitments under the noncancelable operating lease are
$25,800. The lease expires in March 2006. NOTE 6  DEPOSITS A summary of deposits at December 31 follows: 2004
    
    
    2003Noninterest-bearing
    
    $
    16,337,136
    
    
    $
    16,363,536Interest-bearing demand
    
    
    30,042,544
    
    
    
    23,678,083Savings
    
    
    16,300,067
    
    
    
    15,863,335Certificates of deposit of $100,000 or more
    
    
    37,690,093
    
    
    
    44,648,410Other time
    
    
    59,937,931
    
    
    
    57,672,004$
    160,307,771
    
    
    $
    158,225,368
 Interest expense on deposits of $100,000 or more amounted to $989,439 in 2004 and $966,533 in 2003.   (Continued) F-12.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 6  DEPOSITS(continued) Scheduled maturities of time deposits for the next five years were as follows: 2005
    
    $
    61,917,2952006
    
    
    23,032,6182007
    
    
    5,693,8052008
    
    
    2,439,1652009
    
    
    4,545,140Thereafter
    
    
    $
    97,628,024
 NOTE 7  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are secured by securities with a carrying amount of
$4,050,000 and $5,296,000 at year-end 2004 and 2003. Securities sold under agreements to repurchase are financing arrangements that do not have a stated
maturity, but may be cancelled by either party with a five-day written notice. At termination, the
securities underlying the agreements are returned to the Company. Information concerning
securities sold under agreements to repurchase is summarized as follows: 2004
    
    
    2003Average daily balance during the year
    
    $
    2,102,000
    
    
    $
    2,497,000Average interest rate during the year
    
    
    .86
    %
    
    
    .95
    %Maximum month-end balance during the year
    
    
    2,700,000
    
    
    
    3,186,000Weighted average interest rate at year-end
    
    
    1.31
    %
    
    
    .66
    %
 NOTE 8  INCOME TAXES The components of income tax expense for the years ended December 31 were as follows: 2004
    
    
    2003CurrentFederal
    
    $
    1,007,321
    
    
    $
    1,066,293State
    
    
    222,202
    
    
    
    213,6811,229,523
    
    
    
    1,279,974DeferredFederal
    
    
    (87,733
    )
    
    
    (176,336
    )State
    
    
    (29,267
    )
    
    
    (34,664
    )(117,000
    )
    
    
    (211,000
    )$
    1,112,523
    
    
    $
    1,068,974
   (Continued) F-13.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 8  INCOME TAXES(continued) The reasons for the differences between the statutory federal income tax rate and the effective tax
rate for the years ended December 31 are summarized as follows: 2004
    
    
    2003Tax at statutory rate
    
    $
    1,060,540
    
    
    $
    1,023,377Increase (decrease) resulting fromState income tax, net of federal effect
    
    
    128,000
    
    
    
    118,000Tax-exempt interest
    
    
    (22,000
    )
    
    
    (20,000
    )Other, net
    
    
    (54,017
    )
    
    
    (52,403
    )$
    1,112,523
    
    
    $
    1,068,974
 The tax effect of each type of temporary difference that gives rise to deferred tax assets and liabilities is as follows: 2004
    
    
    2003Deferred tax assets:Provision for loan losses
    
    $
    616,000
    
    
    $
    550,000Deferred compensation
    
    
    192,000
    
    
    
    98,000Unrealized losses on securities
    
    
    45,000
    
    
    
    Other
    
    
    138,000
    
    
    
    59,000$
    991,000
    
    
    $
    707,000Deferred tax liabilities:Fixed assets
    
    $
    (350,000
    )
    
    $
    (311,000
    )Federal Home Loan Bank stock dividend
    
    
    (216,000
    )
    
    
    (192,000
    )Unrealized gains on securities
    
    
    
    
    
    
    (43,000
    )Other
    
    
    (59,000
    )
    
    
    $
    (625,000
    )
    
    $
    (546,000
    )Net deferred tax asset
    
    $
    366,000
    
    
    $
    161,000
 NOTE 9  RELATED PARTY TRANSACTIONS Loans to principal officers, directors, and their affiliates in 2004 were as follows. Beginning balance
    
    $
    5,484,079New loans
    
    
    317,359Repayments
    
    
    (909,971
    )Ending balance
    
    $
    4,891,467
 Deposits from principal officers, directors, and their affiliates at year-end 2004 and 2003 were
$1,482,482 and $963,907, respectively.   (Continued) F-14.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 10  FEDERAL HOME LOAN BANK ADVANCES At year-end, advances from the Federal Home Loan Bank were as follows. 2004
    
    
    2003Maturities March 2010 through March 2011,
primarily fixed rates from 4.28% to 6.26%,
averaging 4.78%
    
    $
    12,000,000
    
    
    $
    12,000,000Short term variable rate advances, rate at
December 31, 2004 was 2.48%
    
    
    7,010,000
    
    
    
    $
    19,010,000
    
    
    $
    12,000,000
 Each advance is payable at its maturity date. The long term fixed rate advances totaling
$12,000,000 have a prepayment penalty. The prepayment penalty would be based on the market rates
and the length of time remaining until maturity at the time of payoff. The advances were collateralized by $25,000,000 and $15,000,000 of first mortgage loans under a
blanket lien arrangement at year-end 2004 and 2003. NOTE 11  SUBORDINATED DEBENTURES AND OTHER DEBT On December 18, 2001, the Company borrowed $4,000,000 of floating rate mandatory redeemable
securities through a special purpose entity, Rogersville Statutory Trust I, as part of a private
offering. The rate which varies quarterly with LIBOR was 6.11% at December 31, 2004. The
securities mature on December 18, 2031, however, the maturity may be shortened to a date not
earlier than December 18, 2006. Debt issue costs of $121,000 have been capitalized and are being
amortized over the term of the securities. On September 21, 2004, the Company borrowed $3,000,000 of floating rate mandatory redeemable
securities through a special purpose entity, Rogersville Statutory Trust II, as part of a private
offering. The rate which varies quarterly with LIBOR was 4.80% at December 31, 2004. The
securities mature on September 21, 2034, however, the maturity may be shortened to a date not
earlier than September 21, 2009. No debt issue costs have been capitalized over the term of the securities. These securities are presented in liabilities on the balance sheet and count as Tier 1 capital for
regulatory capital purposes. The Company has in effect a line of credit with a financial institution of $4,500,000, which is
secured by all the shares of the subsidiary bank. The interest rate floats with the 30-day LIBOR
rate and was 2.420% and 3.00% at December 31, 2004 and 2003. The line matures in 2005. The
balance outstanding on the line was $0 and $350,000 at year-end 2004 and 2003. The Bank also has available federal funds lines (or equivalent thereof) with correspondent banks
totaling $14,700,000. None of these lines were drawn as of December 31, 2004. No collateral was
pledged related to these lines as of December 31, 2004. NOTE 12  SHAREHOLDERS EQUITY The Companys charter authorizes 1,000,000 shares of preferred stock, no par value. Shares of the
preferred stock may be issued from time to time in one or more series, each such series to be so
designated as to distinguish the shares thereof from the shares of all other series and classes.
The board   (Continued) F-15.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 12  SHAREHOLDERS EQUITY(continued) of directors has the authority to divide any or all classes of preferred stock and to fix and
determine the relative rights and preferences of the shares of any series so established. NOTE 13  REGULATORY CAPITAL REQUIREMENTS Banks and bank holding companies are subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt
corrective action regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure to meet capital
requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized,
although these terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized,
capital distributions are limited, as is asset growth and expansion, and capital restoration plans
are required. As of December 31, 2004 and 2003, the most recent regulatory notifications
categorized the Bank as well capitalized under the regulatory framework for prompt corrective
action. The banks capital amounts and ratios at December 31, 2004 and 2003, were as follows: To Be WellCapitalized UnderFor Capital

    
    
    Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action Provisions($ amounts in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio2004Total Capital to risk weighted assetsBank
    
    $
    20,879
    
    
    
    11.49
    %
    
    $
    14,533
    
    
    
    8.00
    %
    
    $
    18,167
    
    
    
    10.00
    %Consolidated
    
    
    21,270
    
    
    
    11.68
    %
    
    
    14,570
    
    
    
    8.00
    %
    
    
    18,212
    
    
    
    10.00
    %Tier 1 (Core) Capital to risk weighted assetsBank
    
    $
    19,000
    
    
    
    10.46
    %
    
    $
    7,267
    
    
    
    4.00
    %
    
    $
    10,900
    
    
    
    6.00
    %Consolidated
    
    
    16,521
    
    
    
    9.07
    %
    
    
    7,285
    
    
    
    4.00
    %
    
    
    10,927
    
    
    
    6.00
    %Tier 1 (Core) Capital to average assetsBank
    
    $
    19,000
    
    
    
    9.41
    %
    
    $
    8,080
    
    
    
    4.00
    %
    
    $
    10,099
    
    
    
    5.00
    %Consolidated
    
    
    16,521
    
    
    
    8.15
    %
    
    
    8,104
    
    
    
    4.00
    %
    
    
    10,130
    
    
    
    5.00
    %2003Total Capital to risk weighted assetsBank
    
    $
    16,491
    
    
    
    10.3
    %
    
    $
    12,748
    
    
    
    8.00
    %
    
    $
    15,935
    
    
    
    10.00
    %Consolidated
    
    
    16,449
    
    
    
    10.3
    %
    
    
    12,767
    
    
    
    8.00
    %
    
    
    15,959
    
    
    
    10.00
    %Tier 1 (Core) Capital to risk weighted assetsBank
    
    $
    14,755
    
    
    
    9.3
    %
    
    $
    6,374
    
    
    
    4.00
    %
    
    $
    9,561
    
    
    
    6.00
    %Consolidated
    
    
    14,284
    
    
    
    9.0
    %
    
    
    6,384
    
    
    
    4.00
    %
    
    
    9,576
    
    
    
    6.00
    %Tier 1 (Core) Capital to average assetsBank
    
    $
    14,755
    
    
    
    7.9
    %
    
    $
    7,434
    
    
    
    4.00
    %
    
    $
    9,292
    
    
    
    5.00
    %Consolidated
    
    
    14,284
    
    
    
    7.7
    %
    
    
    7,434
    
    
    
    4.00
    %
    
    
    9,292
    
    
    
    5.00
    %
   (Continued) F-16.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 13  REGULATORY CAPITAL REQUIREMENTS(continued) The Bank is also subject to state regulations restricting the amount of dividends payable to the
Company. At year-end 2004, the Bank had $3,600,000 of retained earnings available for dividends
under these regulations. NOTE 14  STOCK COMPENSATION PLANS The Company has two stock option plans, the 1994 Stock Option Plan (the employee plan), and the
Outside Directors Stock Option Plan (the directors plan), which are described below. Exercise
price is the market price at date of grant, so there is no compensation expense recognized in the
income statement. All options expire within ten years from the date of grant. 1994 Stock Option Plan  This plan provides for the granting of options to purchase up to 475,000
shares by officers and key employees of the Company. On January 22, 2004, options were granted to
key officers to purchase 32,000 shares of stock. These shares become exercisable over 1 to 10
years. No options were granted in 2003. Outside Directors Stock Option Plan  Adopted in 1994, this plan provides for the granting of
options to purchase up to 150,000 shares by non-employee directors of the Company. These options
become exercisable over 5 years. No options were granted in 2004 or 2003. A summary of the status of the Companys stock option plans for the two years ended December 31,
2004 and the changes during those years is presented below: Total Option
    
    
    Average
    
    
    ExercisableShares
    
    
    Exercise
    
    
    OptionsOutstanding
    
    
    Price
    
    
    OutstandingOptions outstanding at December 31, 2002
    
    
    55,740
    
    
    
    8.75
    
    
    
    53,940Options which became exercisable
    
    
    
    
    
    
    12.67
    
    
    
    1,800Options exercised
    
    
    (10,690
    )
    
    
    6.85
    
    
    
    (10,690
    )Options outstanding at December 31, 2003
    
    
    45,050
    
    
    $
    8.75
    
    
    
    45,050Options granted
    
    
    32,000
    
    
    
    16.00
    
    
    
    Options which became exercisable
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    (20,815
    )
    
    
    5.49
    
    
    
    (20,815
    )Options outstanding at December 31, 2004
    
    
    56,235
    
    
    $
    13.71
    
    
    
    24,235
 The effect of these options on earnings per common share was to increase average shares outstanding
by 12,496 and 7,600 in 2004 and 2003. There were no antidilutive options as of December 31, 2004
and 2003.   (Continued) F-17.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 14  STOCK COMPENSATION PLANS(continued) The following table summarizes information about the stock options outstanding under the Companys
plans at December 31, 2004: Exercise
    
    Number
    
    
    Average
    
    
    NumberPrice
    
    Outstanding
    
    
    Remaining Life
    
    
    Exercisable6.00
    
    
    3,000
    
    
    2 years
    
    
    3,0007.33
    
    
    3,000
    
    
    3 years
    
    
    3,0009.33
    
    
    4,735
    
    
    4 years
    
    
    4,73512.67
    
    
    7,500
    
    
    5 years
    
    
    7,50013.33
    
    
    6,000
    
    
    6 years
    
    
    6,00016.00
    
    
    32,000
    
    
    9 years
    
    
    32,000
 NOTE 15  EMPLOYEE BENEFITS The Bank maintains a 401(k) plan for all employees who have attained the age of 21 and have at
least one year of service. The plan provides for a discretionary employer matching contribution.
The Bank may also make additional discretionary contributions as determined by the Board of
Directors. Employees begin to vest in the second year and are fully vested after six years. The
Banks contribution to the 401K plan amounted to $35,439 in 2004 and $29,528 in 2003. The Company has a non-qualified deferred compensation arrangement with a former employee. A
present value based charge, which is included in non-interest expense, is made each year based on
the future benefits to be paid to the employee (or beneficiary) under the plan. Total amounts paid
or accrued under such arrangements amounted to $25,000 in 2004 and $23,000 in 2003. A discount
rate of 6.75% is used to compute the amount paid. The Company has a Supplemental Executive Retirement Plan for key officers and employees. A present
value based charge is made each year based on future benefits to be paid to the officers under the
plan. The plan contains certain financial goals which must be achieved annually before a
contribution is required. This plan offers retirement and death benefits to these officers.
Expense related to this plan using a discount rate of 7.5% was $255,000 in 2004 and $188,000 in
2003, and is included in salaries and employee benefits expense. During 2003, the Company granted 8,500 shares of stock to certain key officers as additional
compensation. The shares were valued at $14.75 per share, which represented the estimated fair
market value of the shares at the date of the grant. The grants contained no restrictions on the
disposal or transfer of the shares by the officers. Compensation expense equal to the total market
value of $125,375 is included in salaries and employee benefits expense. NOTE 16  OFF-BALANCE SHEET ACTIVITIES Some financial instruments, such as loan commitments, credit lines, letters of credit, and
overdraft protection, are issued to meet customer financing needs. These are agreements to provide
credit or to support the credit of others, as long as conditions established in the contract are
met, and usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss   (Continued) F-18.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 16  OFF-BALANCE SHEET ACTIVITIES(continued) exists up to the face amount of these instruments, although material losses are not anticipated.
The same credit policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance-sheet risk was as follows at year end. 2004
    
    
    2003Fixed
    
    
    Variable
    
    
    Fixed
    
    
    VariableRate
    
    
    Rate
    
    
    Rate
    
    
    RateCommitments to make loans
    
    $
    3,830,000
    
    
    $
    23,439,000
    
    
    $
    2,614,000
    
    
    $
    13,861,000Unused letters of credit
    
    
    
    
    
    
    2,751,955
    
    
    
    
    
    
    
    3,012,550
 Commitments to make loans are generally made for periods of 1 year or less. The fixed rate loan
commitments have interest rates ranging from 5.25% to 21.00% and maturities ranging from 1 year to
5 years. NOTE 17  FAIR VALUES OF FINANCIAL INSTRUMENTS Carrying amount and estimated fair values of financial instruments were as follows at year-end: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    5,163,142
    
    
    $
    5,163,000
    
    
    $
    9,336,097
    
    
    $
    9,336,000Securities
    
    
    15,690,735
    
    
    
    15,691,000
    
    
    
    14,515,480
    
    
    
    14,515,000Loans receivable, net
    
    
    166,071,100
    
    
    
    167,152,000
    
    
    
    151,576,009
    
    
    
    153,010,000Accrued interest receivable
    
    
    1,066,616
    
    
    
    1,067,000
    
    
    
    1,154,997
    
    
    
    1,155,000FHLB and Bankers Bank stock
    
    
    1,641,315
    
    
    
    1,641,000
    
    
    
    1,578,723
    
    
    
    1,579,000Financial liabilitiesDeposits
    
    $
    160,307,771
    
    
    $
    160,237,000
    
    
    $
    158,225,368
    
    
    $
    159,997,000Securities sold under
repurchase agreements
    
    
    1,433,909
    
    
    
    1,434,000
    
    
    
    1,920,416
    
    
    
    1,920,000Borrowings from FHLB
    
    
    19,010,000
    
    
    
    19,655,000
    
    
    
    12,000,000
    
    
    
    13,047,000Subordinated debentures
    
    
    7,000,000
    
    
    
    7,000,000
    
    
    
    4,000,000
    
    
    
    4,000,000Note payable
    
    
    
    
    
    
    
    
    
    
    350,000
    
    
    
    350,000Accrued interest payable
    
    
    598,897
    
    
    
    599,000
    
    
    
    567,664
    
    
    
    568,000
 The methods and assumptions used to estimate fair value are described as follows. Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings,
Federal Home Loan Bank and Bankers Bank stock, accrued interest receivable and payable, demand
deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully.
Security fair values are based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the issuer. For fixed rate
loans or deposits and for variable rate   (Continued) F-19.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 17  FAIR VALUES
OF FINANCIAL INSTRUMENTS(continued) loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit risk. Fair values
for impaired loans are estimated using discounted cash flow analysis or underlying collateral
values. Fair value of debt is based on current rates for similar financing. The fair value of
off-balance-sheet loan commitments is considered nominal.   (Continued) F-20.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003   NOTE 18  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of First Community Corporation follows. Condensed Balance Sheets,December 312004
    
    
    2003ASSETSCash and cash equivalents
    
    $
    39,375
    
    
    $
    67,024Investment in banking subsidiary
    
    
    18,927,059
    
    
    
    14,686,149Investment in and advances to other subsidiaries
    
    
    217,000
    
    
    
    124,000Other assets
    
    
    499,432
    
    
    
    372,998Total assets
    
    $
    19,682,866
    
    
    $
    15,250,171LIABILITIES AND EQUITYSubordinated debentures
    
    $
    7,217,000
    
    
    $
    4,124,000Long-term debt
    
    
    
    
    
    
    350,000Accrued expenses and other liabilities
    
    
    148,128
    
    
    
    132,366Shareholders equity
    
    
    12,317,738
    
    
    
    10,643,805Total liabilities and shareholders equity
    
    $
    19,682,866
    
    
    $
    15,250,171
 Condensed Statements of IncomeYears ended December 31
    
    2004
    
    
    2003Dividends from subsidiary
    
    $
    669,621
    
    
    $
    807,599Other income
    
    
    7,320
    
    
    
    6,062Interest expense
    
    
    265,466
    
    
    
    218,362Other expense
    
    
    121,212
    
    
    
    120,401Income before income tax and
undistributed subsidiary income
    
    
    290,263
    
    
    
    474,898Income tax expense (benefit)
    
    
    (146,937
    )
    
    
    (128,730
    )Equity in undistributed subsidiary income
    
    
    1,569,512
    
    
    
    1,337,329Net income
    
    $
    2,006,712
    
    
    $
    1,940,957
   (Continued) F-21.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 18  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION(continued) Condensed Statements of Cash FlowsYears ended December 312004
    
    
    2003Cash flows from operating activitiesNet income
    
    $
    2,006,712
    
    
    $
    1,940,957Adjustments:Equity in undistributed subsidiary income
    
    
    (1,569,512
    )
    
    
    (1,337,330
    )Non cash proceeds from issuance of common stock
    
    
    91,074
    
    
    
    125,375Change in other assets
    
    
    (126,435
    )
    
    
    188,145Change in other liabilities
    
    
    15,762
    
    
    
    1,342Net cash from operating activities
    
    
    417,601
    
    
    
    918,490Cash flows from investing activitiesInvestments in and advances to bank subsidiary
    
    
    (2,674,917
    )
    
    
    Investments in and advances to other subsidiary
    
    
    (93,000
    )
    
    
    Net cash from investing activities
    
    
    (2,767,917
    )
    
    
    Cash flows from financing activitiesRepayments of borrowings
    
    
    (350,000
    )
    
    
    (453,000
    )Proceeds from issuance of subordinated debentures
    
    
    3,093,000
    
    
    
    Proceeds from stock issuance
    
    
    114,288
    
    
    
    73,221Dividends paid
    
    
    (534,621
    )
    
    
    (527,598
    )Net cash from financing activities
    
    
    2,322,667
    
    
    
    (907,377
    )Net change in cash and cash equivalents
    
    
    (27,649
    )
    
    
    11,113Beginning cash and cash equivalents
    
    
    67,024
    
    
    
    55,911Ending cash and cash equivalents
    
    $
    39,375
    
    
    $
    67,024
   (Continued) F-22.




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##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003  NOTE 19  EARNINGS PER SHARE The factors used in the earnings per share computation follow. 2004
    
    
    2003BasicNet income
    
    $
    2,006,712
    
    
    $
    1,940,957Weighted average common share outstanding
    
    
    1,905,616
    
    
    
    1,881,269Basic earnings per common share
    
    $
    1.05
    
    
    $
    1.03DilutedNet income
    
    $
    2,006,712
    
    
    $
    1,940,957Weighted average common shares outstanding
for basic earnings per common share
    
    
    1,905,616
    
    
    
    1,881,269Add: Dilutive effects of assumed exercises
of stock options
    
    
    12,496
    
    
    
    7,600Average share and dilutive potential common share
    
    
    1,918,112
    
    
    
    1,888,869Diluted earnings per common share
    
    $
    1.05
    
    
    $
    1.03
 No options were antidilutive for 2004 and 2003.   F-23.




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##### Table of Contents



ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no disagreements with the Companys independent accountants on any
matters of accounting principles or practices, financial statement disclosure, or auditing scope or
procedure. 
 ITEM 8A. Controls and Procedures An evaluation was performed under the supervision and with the participation of the
Companys management, including Mark A. Gamble, the principal executive officer, and Elizabeth O.
Lollar, the principal financial officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Companys management, including the principal executive officer and
principal financial officer, concluded that the Companys disclosure controls and procedures are
effective as of December 31, 2004. There have been no significant changes in the Companys
internal control over financial reporting during the quarter ended December 31, 2004, that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting. 
 ITEM 8B. Other Information. On
September 21, 2004, the Company borrowed $3,000,000 of floating rate
mandatory redeemable securities through a special purpose entity,
Rogersville Statutory Trust II, as part of a private offering. See
Note 11 to Consolidated Financial Statements in Item 7. PART III 
 ITEM 9. Directors and Executive Officers of the Registrant The information relating to directors and executive officers required by this item will be
contained in a definitive Proxy Statement, which the Company will file with the Securities and
Exchange Commission not later than 120 days after December 31, 2004 (the Proxy Statement), and
such information is incorporated herein by reference. The information required pursuant to Item 405 of Regulation S-B will be contained under the
caption Compliance with Section 16(a) of the Exchange Act in the Companys Proxy Statement, and
such information is incorporated herein by reference. 
 ITEM 10. Executive Compensation The information required by this item will be contained under the caption Compensation of
Directors and Officers in the Companys Proxy Statement, and such information is incorporated
herein by reference. 
 ITEM 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters The information required pursuant to Item 201(d) of Regulation S-B (regarding securities
authorized for issuance under equity compensation plans) is set forth as a table in Item 5 of this
report. The information required pursuant to Item 403 of Regulation S-B will be contained under the
caption Security Ownership of Certain Beneficial Owners and Management in the Companys Proxy
Statement, and such information is incorporated herein by reference. 
 ITEM 12. Certain Relationships and Related Transactions The information required by this item will be contained under the caption Certain
Relationships and Related Transactions in the Companys Proxy Statement, and such information is
incorporated herein by reference. 28




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##### Table of Contents



ITEM 13. Exhibits and Reports on Form 8-K  (a)
    List of Exhibits Filed Exhibit Number
    
    Description3.1
    
    
    Charter of Registrant, filed as Exhibit 3(a) as part of the Registration
Statement No. 33-75848 on Form S-4, filed March 1, 1994, and incorporated
herein by reference.3.2
    
    
    Bylaws of Registrant, filed as Exhibit 3(b) as part of the Registration
Statement No. 33-75848 on Form S-4, filed March 1, 1994, and incorporated
herein by reference.4.1
    
    
    Rights Agreement, dated April 26, 2000,between First Community
Corporation and First Union National Bank, including Form of Rights
Certificate, Form of Summary of Rights, and Articles of Amendment to the
Charter of First Community Corporation, filed as Exhibit 1 to the Current
Report on Form 8-K, filed May 23, 2000, and incorporated herein by
reference.10.1
    
    
    First Community Corporation 1994 Stock Option Plan, filed as Appendix C
to Registration Statement No. 33-75848 on Form S-4, filed March 1, 1994, and
incorporated herein by reference.10.2
    
    
    First Community Corporation Outside Directors Stock Option Plan, filed
as Appendix D to Registration Statement No. 33-75848 on Form S-4, filed
March 1, 1994, and incorporated herein by reference.10.3
    
    
    Lease Agreement effective November 1, 2002, between A. Max Richardson
(a director of the registrant) as lessee and First Community Bank of East
Tennessee as lessor, filed as exhibit 10.3 to the Annual Report on Form
10-K, filed March 31, 2003, and incorporated herein by this reference.14
    
    
    Conflict of Interest/Code of Ethics Policy, filed as Appendix B to the
Notice of Annual Meeting of Shareholders and Proxy Statement on Schedule
14(a) filed April 21, 2004, and incorporated herein by this reference11*
    
    
    Statement Regarding Computation of Earnings Per Share (included in Item
7, Financial Statements and incorporated herein by reference).21*
    
    
    Subsidiaries of the Registrant23*
    
    
    Consent of Crowe Chizek and Company LLC32.1*
    
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)32.2*
    
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
    
 ITEM 14. Principal Accountant Fees and Services The information relating to the Companys independent accountants required by this item will
be contained under the caption Principal Accountant Fees and Services in the Companys Proxy
Statement, and such information is incorporated herein by reference. 29




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST COMMUNITY CORPORATION(Registrant)By:
    /s/ Mark A. Gamble
 Mark
A. Gamble, PresidentDate:
    
    March 30, 2005
 In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated. By:
    /s/ William J. KrickbaumWilliam J. Krickbaum, Chairman of the BoardDate:
    
    March 30, 2005By:
    /s/ Mark A. Gamble
 Mark
A. Gamble, President and DirectorDate:
    
    March 30, 2005By:
    /s/ Leland A. Davis
 Leland
A. Davis, DirectorDate:
    
    March 30, 2005By:
    /s/ Kenneth E. Jenkins
 Kenneth
E. Jenkins, DirectorDate:
    
    March 30, 2005By:
    /s/ David R. Johnson
 Dr. David
R. Johnson, DirectorDate:
    
    March 30, 2005By:
    /s/ Sidney K. Lawson
 Sidney
K. Lawson, DirectorDate:
    
    March 30, 2005By:
    /s/ A. Max RichardsonA.
Max Richardson, Director
 30




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##### Table of Contents



Date:
    
    March 30, 2005By:
    /s/ Stewart A. Taylor
 Stewart
A. Taylor, DirectorDate:
    
    March 30, 2005By:
    /s/ Tommy W. Young
 Tommy
W. Young, DirectorDate:
    
    March 30, 2005
 31