##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-KSB 
 For the Fiscal Year ended December 31, 2003 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. x 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 x The issuers revenues for the fiscal year ending December 31, 2003:
$12,200,000. 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 January 31, 2004, is $22,191,568 for 1,386,973 shares, at
an estimated $16 per share. Shares of the issuers common stock outstanding as of March 30, 2004:
1,902,360 Transitional Small Business Disclosure Format (check one): YES o NO x




---



##### Table of Contents



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, 2003, are incorporated by reference into Part III of this annual
report on Form 10-KSB.




---



TABLE OF CONTENTS  ITEM 1. Description of BusinessOverviewPersonnelCompetitionLending Services and Loan ReviewInvestment PolicyMonetary PoliciesSupervision and RegulationOverviewCapitalPayment of DividendsThe Companys Support of the BankPrompt Corrective ActionAcquisition and ExpansionFDIC InsuranceCertain Transactions by the Company with its AffiliatesInterest Rate LimitationsGeneral Effect of Federal Monetary PolicyEffect of Specific Banking LegislationITEM 2. Description of PropertyOverviewOwned PropertiesMain OfficeOperations Center, Branch Sites and Undeveloped PropertyLeased PropertyITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of ShareholdersITEM 5. Market for Registrants Common Equity and Related Stockholder MattersTrading HistoryEquity HoldersPayment of DividendsSecurities Authorized for Issuance under Equity Compensation PlansITEM 6. Managements Discussion and Analysis of Financial Condition and Results of OperationsOverviewFinancial ConditionLiquidity And Interest Rate RiskOff-Balance Sheet ArrangementsCritical Accounting PoliciesResults Of OperationsComparison of Years Ended December 31, 2003, and 2002Net Interest IncomeProvision for Loan LossesNoninterest IncomeNoninterest ExpensesProvision for Income TaxesITEM 7. Financial StatementsITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureITEM 8A. Controls and ProceduresITEM 9. Directors and Executive Officers of the RegistrantITEM 10. Executive CompensationITEM 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersITEM 12. Certain Relationships and Related TransactionsITEM 13. Exhibits and Reports on Form 8-KITEM 14. Principal Accountant Fees and ServicesSIGNATURESEX-21  LIST OF SUBSIDIARIESEX-23  CONSENT OF CROWE CHIZEK & COMPANYEX-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    Table of Contents  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
    
    
    2Competition
    
    
    3Lending Services and Loan Review
    
    
    3Investment Policy
    
    
    3Monetary Policies
    
    
    3Supervision and Regulation
    
    
    3Capital
    
    
    4Payment of Dividends
    
    
    4The Companys Support of the Bank
    
    
    4Prompt Corrective Action
    
    
    5Acquisition and Expansion
    
    
    6FDIC Insurance Assessments and Deposit Insurance Funds Act of 1996
    
    
    6Certain Transactions by the Company with its Affiliates
    
    
    7Interest Rate Limitations
    
    
    7Effect of Government Policies
    
    
    7Standards for Safety and Soundness
    
    
    7Brokered Deposits
    
    
    7Consumer Protection Provisions
    
    
    7Gramm-Leach-Bliley Act
    
    
    8USA Patriot Act of 2001
    
    
    9Other Pending and Proposed Legislation
    
    
    9ITEM 2. Description of Property
    
    
    10Owned Properties
    
    
    10Main Office
    
    
    10Operations Center, Branch Sites and Undeveloped Property
    
    
    10Leased Property
    
    
    10ITEM 3. Legal Proceedings
    
    
    10ITEM 4. Submission of Matters to a Vote of Shareholders
    
    
    11ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    11Trading History
    
    
    11Equity Holders
    
    
    11Payment of Dividends
    
    
    11Securities Authorized for Issuance under Equity Compensation Plans
    
    
    12ITEM 6. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Overview
    
    
    12Financial Condition
    
    
    12Liquidity And Interest Rate Risk
    
    
    14Results Of Operations
    
    
    16Comparison of Years Ended December 31, 2003, and 2002
    
    
    16Net Interest Income
    
    
    16Provision for Loan Losses
    
    
    16Noninterest Income
    
    
    16Noninterest Expenses
    
    
    16Provision for Income Taxes
    
    
    17ITEM 7. Financial Statements
    
    
    24ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    25ITEM 8A. Controls and Procedures
    
    
    25ITEM 9. Directors and Executive Officers of the Registrant
    
    
    25ITEM 10. Executive Compensation
    
    
    25
 i




---



##### Table of Contents



ITEM 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    25ITEM 12. Certain Relationships and Related Transactions
    
    
    25ITEM 13. Exhibits and Reports on Form 8-K
    
    
    26ITEM 14. Principal Accountant Fees and Services
    
    
    26SIGNATURES
    
    
    27EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 _________________________________________ ii




---



##### Table of Contents



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 our growth will depend primarily
on our ability to attract, assimilate and retain additional
qualified personnel, monitor operations, maintain increased
earnings levels, control costs, and maintain positive
customer relations. If we fail to achieve these objectives in
an efficient and timely manner, we may experience
interruptions and dislocation in our business.  
    
    We depend on our executive officers and key personnel
to implement our business strategy and could be harmed by the
loss of their services.  
    
    Although management believes that its allowance for
loan losses is adequate, there can be no assurance that the
allowance will prove sufficient to cover future loan losses.  
    
    Our earnings are subject to interest rate risk,
especially if rates fall.  
    
    All of our lending involves underwriting risks,
especially in a competitive lending market.  
    
    We operate in a competitive market dominated by banks
and other financial services providers, many of which offer a
broader range of services than we provide and have lower cost
structures.  
    
    Trading in our common stock has not been extensive,
and you may have difficulty selling your shares in the
future. Because of these factors, there can be no assurance that the
forward-looking statements included or incorporated by reference herein will
prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included or incorporated by reference herein,
you should not regard the inclusion of such information as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved. 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.    1




---



##### Table of Contents



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 its opening in April 1993 through the end of 2003, the Bank has
grown to total assets of more than $188,000,000. The Banks primary trade area comprises Hawkins and Sullivan Counties,
Tennessee, which had populations of approximately 54,000 and 154,000
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. No material
portion of the Banks deposits has been obtained from any single person or
group of persons, with the exception of a $12 million certificate of deposit
from a local governmental entity. 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 2003 ended, the Bank served the Rogersville, Church Hill, and
Kingsport communities with five full-service banking centers: the main office
and one branch in East Rogersville, a branch inside the Super Wal-Mart Store in
Rogersville, the branch in Church Hill, and a new branch in Kingsport. 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 East 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. The Bank expanded its reach in
October 2002 when it celebrated the opening of its newest full-service office
in Kingsport and, together with the Church Hill branch, the Bank is positioned
to serve the densely populated east Hawkins County and Kingsport markets with a
full range of deposit and loan services. 
 Personnel Although the Bank has been in existence for only a decade, management
believes that it has been able to attract and retain quality personnel with a
high degree of experience and expertise. The Banks personnel have career
experience in the banking industry ranging from one to thirty-five 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. The Bank employed a total of approximately 61 people as of
December 31, 2003, with approximately 53 employed on a full-time basis. The
Company is not a party to any collective bargaining agreement and believes that
its employee relations generally are good. The Company offers several employee
benefit programs, including a 401(k) plan, group life and health insurance, an
incentive program, paid vacations, and sick leave. 2




---



##### Table of Contents



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 eight commercial
banks and in Sullivan County with eleven 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 in excess of $750,000
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. 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 undertaken
internally 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 $200,000. 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. 
 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. The Company and the Bank are subject to extensive regulation under state
and federal statutes and regulations. The discussion in this section, which
briefly summarizes certain of such statutes, does not purport to be 3




---



##### Table of Contents



complete, and is qualified in its entirety by reference to such statutes.
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 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. 
 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 (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 (Tier 1 Capital). The remainder, Tier 2 Capital, may consist
of subordinated debt, other preferred stock and a limited amount of loan loss
reserves. At December 31, 2003, the Companys subsidiary banks risk-based
Tier 1 Capital and risk-based Total Capital ratios were 7.94% and 10.35%,
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. 
 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. 4




---



##### Table of Contents



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. 
 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, 2003, 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




---



##### Table of Contents



Acquisition and Expansion. The Bank Holding Company Act requires any bank holding company to obtain
the prior approval of the Federal Reserve Board before it may acquire
substantially all the assets of any bank, or ownership or control of any voting
shares of any bank, if, after acquiring such shares, it would own or control
directly or indirectly, more than 5% of the voting shares of such bank.
Effective September 29, 1995, the Tennessee Bank Structure Act of 1974 was
amended to, among other things, prohibit (subject to certain exceptions) a bank
holding company from acquiring a bank for which the home state is Tennessee if,
upon consummation, the company would directly or indirectly control 30% or more
of the total deposits in insured depository institutions in Tennessee. As of
December 31, 2003, the Company estimates it held less than 1% of such deposits.
Subject to certain exceptions, the Tennessee Bank Structure Act prohibits a
bank holding company from acquiring a bank in Tennessee that has been in
operation for less than five years. Tennessee banks may open additional
branches in any county in the state. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the IBBEA) authorizes interstate acquisitions of banks and bank holding
companies without geographic limitation beginning one year after enactment. In
addition, beginning June 1, 1997, a bank may merge with a bank in another state
as long as neither of the states has opted out of interstate branching between
the date of enactment of the IBBEA and May 31, 1997. The IBBEA further
provides that states may enact laws permitting interstate merger transactions
prior to June 1, 1997. A bank may establish and operate a de novo branch in a
state in which the bank does not maintain a branch if that state expressly
permits de novo branching. Once a bank has established branches in a state
through an interstate merger transaction, the bank may establish and acquire
additional branches at any location in the state where any bank involved in the
interstate merger transaction could have established or acquired branches under
applicable federal or state law. A bank that has established a branch in a
state through de novo branching may establish and acquire additional branches
in such state in the same manner and to the same extent as a bank having a
branch in such state as a result of an interstate merger. If a state opts out
of interstate branching within the specified time period, no bank in any other
state may establish a branch in the opting out state, whether through an
acquisition or de novo. Tennessee law allows banks and bank holding companies
in any state to acquire banks and bank holding companies in Tennessee provided
that the state in which such acquirer is headquartered also permits Tennessee
banks and bank holding companies to acquire banks and bank holding companies in
that state. De novo branching is also permitted under conditions, whereby an
out-of-state bank may acquire a branch office located in Tennessee that has
been in operation for at least 5 years, provided the laws of the home state of
the out-of-state bank permit an acquisition of a branch by a Tennessee bank
under similar conditions. Acquisitions of banks or bank holding companies in
Tennessee require the approval of the Commissioner of Financial Institutions. 
 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 a federal bank regulatory
agency. 6




---



##### Table of Contents



Certain Transactions by the Company with its Affiliates. There also are various legal restrictions on the extent to which the
Company and any nonbank subsidiary can borrow or otherwise obtain credit from
its bank subsidiaries. An insured bank and its subsidiaries are limited in
engaging in covered transactions with its nonbank or nonsavings bank
affiliates to the following amounts: (i) in the case of any such affiliate, the
aggregate amount of covered transactions of the insured bank and its
subsidiaries will not exceed 10% of the capital stock and surplus of the
insured bank; and (ii) in the case of all affiliates, the aggregate amount of
covered transactions of the insured bank and its subsidiaries will not exceed
20% of the capital stock and surplus of the Bank. Covered transactions are
defined by statute to include a loan or extension of credit, as well as
purchase of securities issued by an affiliate, a purchase of assets (unless
otherwise exempted by the Federal Reserve Board), the acceptance of securities
issued by the affiliate as collateral for a loan and the issuance of a
guarantee, acceptance, or letter of credit on behalf of an affiliate.
Further, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. 
 Interest Rate Limitations. The maximum permissible rates of interest on most commercial and consumer
loans made by the Bank are governed by Tennessees general usury law. Certain
other usury laws affect limited classes of loans, but the laws referenced above
are by far the most significant. Tennessees general usury law authorizes a
floating rate of 4% per annum over a statutorily defined base rate and also
allows certain loan charges. 
 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 Banking 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: (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. Brokered Deposits.FDICIA amends the Federal Deposit Insurance Act to
prohibit insured depository institutions that are not well-capitalized from
accepting brokered deposits unless a waiver has been obtained from the FDIC.
Deposit brokers are required to register with FDIC. 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 7




---



##### Table of Contents



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 Registrant, 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
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. 8




---



##### Table of Contents



Management does not believe that this financial services modernization
legislation has negatively affected,
or will negatively affect, the Banks operations. However, to the extent
that this legislation permits banks, securities firms and insurance companies
to affiliate, the financial services industry may experience further
consolidation. This consolidation could result in a growing number of larger
financial institutions that offer a wider variety of financial services than
the Bank 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 U.S.
Department of the Treasury is empowered to administer and make rules to
implement this legislation. Management expects that this legislation may, to
some degree, affect the Banks record keeping and reporting expenses but does
not believe that it has had or will have a material adverse effect on the
Banks business and operations. To the extent that the Bank has already
implemented the requirements of this legislation, compliance has been
accomplished with existing Bank personnel. Other Consumer Laws and Regulations.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. 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 Tennessee legislature and other governmental
bodies in the future. Such 9




---



##### Table of Contents



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 four branches
in Rogersville, Church Hill, and Kingsport, Tennessee. The Bank owns five 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
four 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 with an
additional drive-through facility on property adjacent to the main office. 
 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 a new 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 four 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 the first and second floors,
and the third floor is available for either lease to an outside tenant or
future bank expansion. As of December 31, 2003, the Bank had an option to purchase land for an
additional branch location in Kingsport. The option was exercised at a price of
$506,000 after year end. FDIC approval for the branch has already been granted
and the Bank anticipates the branch will open during the third quarter of 2004. The Bank also owns undeveloped properties on West Main Street in
Rogersville that are available for future expansion. 
 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. 
 ITEM 3. Legal Proceedings From time to time the Company and the Bank is each a party to claims and
legal proceedings arising from normal and ordinary business operations. After
taking into consideration the factors underlying these claims and the
information provided by legal counsel regarding the current status of such
claims or proceedings, in the opinion of management, the ultimate aggregate
liability represented thereby will not have a material adverse effect on the
Banks or the Companys financial condition or results of operations. 10




---



##### Table of Contents



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, 2003. 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 2003 and 2002: 2003
    
    High
    
    LowFirst quarter
    
    $
    16.00
    
    
    
    15.00Second quarter
    
    
    16.50
    
    
    
    14.00Third quarter
    
    
    17.00
    
    
    
    14.00Fourth quarter
    
    
    16.00
    
    
    
    15.00
 2002
    
    High
    
    LowFirst quarter
    
    $
    15.50
    
    
    $
    11.00Second quarter
    
    
    15.95
    
    
    
    13.00Third quarter
    
    
    16.00
    
    
    
    13.00Fourth quarter
    
    
    17.50
    
    
    
    14.00
 The most recent trade of the Companys common stock known to the Company
occurred on March 1, 2004, at a price of $16.00 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, 2003, there were 1,890,945 shares of the Companys
common stock outstanding, and as of March 15, 2004, there were 1,902,360 shares
of the Companys common stock outstanding. 
 Equity Holders As of December 31, 2003, there were approximately 875 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 dividends of $0.28 per share in 2003 and 2002. 11




---



##### Table of Contents



Securities Authorized for Issuance under Equity Compensation Plans The following table provides information as of December 31, 2003,
regarding the options outstanding and available under the Companys 1994 Stock
Option Plan and the Outside Directors Stock Option Plan (adopted in 1994). NUMBER OF SECURITIESTO BE ISSUED UPONEXERCISE OF
    
    WEIGHTED-AVERAGE
    
    NUMBER OF SECURITIESOUTSTANDING OPTIONS,
    
    EXERCISE PRICE OF
    
    REMAINING AVAILABLEWARRANTS AND RIGHTS
    
    OUTSTANDING OPTIONS
    
    FOR FUTURE ISSUANCEEQUITY COMPENSATION
PLANS NOT APPROVED
BY SECURITY HOLDERS
    
    
    33,050
    
    
    $
    9.37
    
    
    
    42,000
 
 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, 2003. 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 Forward Looking Statements preceding
Item 1 of this report.) 
 Financial Condition The Bank grew in total assets by $22.4 million or 13.4% during 2003,
ending the year at $188.8 million in total assets. This growth resulted
primarily from an increase of $21.6 million or 40.6% in commercial real estate
loans (net of participations sold). Loans in the amount of $13.2 million were
obtained in the Kingsport and Sullivan County market during 2003 (as a result
of the branch opened in that market in October 2002) as well as growth of $6.5
million in participation loans purchased from other area banks. The growth in
loans was funded by a combination of utilization of existing liquidity and
growth in depositsboth from the national institutional certificate of deposit
market and local markets. Institutional certificates of deposit obtained on the national market
increased $14.7 million during 2003, ending the year at $18.5 million and
represented 66% of the increase in deposits. Deposit promotions held at all
bank locations resulted in the remaining 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 $12 million certificate of deposit from a
local government entity. Deposits grew at a slower pace than loans in 2003, with loan growth
exceeding deposit growth by $6.8 million. As a result, the Banks investment
in overnight federal funds sold, as of December 31, 2003, was lower than 12




---



##### Table of Contents



the prior year-end balance by $7.1 million or 52% as the portion of these funds
not required for liquidity purposes was used to fund loans. 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 $158.2 million as of December 31, 2003, compared
to $136.2 million of December 31, 2002. Average 2003 deposits increased 24.3%,
or $28.7 million to $147.0 million from $118.3 million in 2002. 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 $16.2 million, and $14.8 million, for
the years ended December 31, 2003 and 2002. Due to the highly competitive
local market for deposits, management anticipates the continued use of
alternative funding sources to partially fund loan growth. Effective December 18, 2001, the Company, through a placement agent, sold
to institutional investors $4,000,000 in trust preferred securities. The
interest rate, which varies quarterly with LIBOR, was 4.77% at December 31,
2003. The proceeds of the issue were used to reduce existing notes payable,
purchase and retire Company stock and contribute capital to the Bank. 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, 2003 were $228,000 or 0.02% of
total loans, up from $142,000 or 0.11% at December 31, 2002. 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 $33,000 or 0.02% of total loans at December 31,
2003, as compared to $169,000 or 0.14% of total loans at December 31, 2002. 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 1.13% of outstanding loans at December 31,
2003, compared to 1.10% at December 31, 2002. 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 $10.6 million or 5.64% of total assets
at December 31, 2003, and $9.2 million or 5.55% of total assets at December 31,
2002. At December 31, 2003, $3.6 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 7.69% at December 31, 2003. Pursuant to an agreement made in 2000 between the Company and the former
president of the Company, the Company purchased and retired 137,604 of the
Companys common stock at an aggregate purchase price of $2,408,070, paid in
three equal annual installments in 2000, 2001, and 2002. The agreement
obligated the Company to purchase the shares at $17.50 per share, and the
payment of the third and final installment fully discharged the Banks
obligation. These purchases were accounted for as direct reductions in
capital. 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 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 $69,000 at December 31, 2003 compared to an increase of
$136,000 as of December 31, 2002. 13




---



##### Table of Contents



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 2003 and 2002.
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 $18.6 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. 14




---



##### Table of Contents



Interest Rate Sensitivity Analysis Amounts Subject to Repricing or Maturing Within
($ in thousands) 0-3
    
    3-12
    
    Total
    
    1-5
    
    OverMonths
    
    Months
    
    1 Yr.
    
    Years
    
    5 Yrs.
    
    TotalASSETSFederal funds sold
    
    $
    6,572
    
    
    $
    
    
    
    $
    6,572
    
    
    $
    
    
    
    $
    
    
    
    $
    6,572Securities available for sale
    
    
    2,112
    
    
    
    1,195
    
    
    
    3,307
    
    
    
    3,962
    
    
    
    7,246
    
    
    
    14,515Loans
    
    
    62,463
    
    
    
    28,356
    
    
    
    90,819
    
    
    
    38,014
    
    
    
    24,479
    
    
    
    153,312Total interest-earning
assets
    
    $
    71,147
    
    
    $
    29,551
    
    
    $
    100,698
    
    
    $
    41,976
    
    
    $
    31,725
    
    
    $
    174,399LIABILITIESInterest-bearing deposits
    
    $
    36,172
    
    
    $
    42,530
    
    
    $
    78,702
    
    
    $
    63,160
    
    
    $
    
    
    
    $
    141,862Other term borrowings
    
    
    
    
    
    
    1,920
    
    
    
    1,920
    
    
    
    
    
    
    
    12,000
    
    
    
    13,920Total interest-bearing
liabilities
    
    $
    36,172
    
    
    $
    44,450
    
    
    $
    80,622
    
    
    $
    63,160
    
    
    $
    12,000
    
    
    $
    155,782Asset (liability) GAP
    
    
    34,975
    
    
    
    (14,899
    )
    
    
    20,076
    
    
    
    (21,184
    )
    
    
    19,725
    
    
    
    18,617Cumulative asset (liability)
GAP
    
    $
    34,975
    
    
    $
    20,076
    
    
    $
    20,076
    
    
    $
    (1,108
    )
    
    $
    18,617
    
    
    $
    18,617
 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.
These arrangements are discussed more fully in Note 1, Summary of Significant
Accounting PoliciesOff-Balance Sheet Financial Instruments, Note 11,
Subordinated Debentures and Other Debt, and Note 16,
Off-Balance Sheet Activities, to the Companys Consolidated
Financial Statements for the years ending December 31, 2003 and 2002. 
 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. 15




---



##### Table of Contents



Results Of Operations 
 Comparison of Years Ended December 31, 2003, and 2002. The Company recorded net income in 2003 of $1,941,000, an increase of
50.5% from 2002 net income of $1,289,400. Return on average shareholders
equity for the years ended December 31, 2003, and 2002 was 19.5%, and 13.5%.
Return on average assets for the years ended December 31, 2003, and 2002 was
1.08%, and .8%. 
 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 funding sources (primarily
noninterest-bearing demand deposits and equity capital). Net interest income increased $563,300 or 9.2% in 2003. The increase was
attributable to the increase in average earning assets of $32.0 million or
23.7% in 2003 and $14.7 million or 12.2% in 2002. The net interest margin
however, which is net interest income expressed as a percentage of average
earning assets, decreased from 4.49% in 2002 to 4.05% in 2003. Two factors
contributed to this reduction: the significant amount of refinancing by
customers to obtain lower loan rates during 2003 due to record low interest
rates, as well as the shift in the mix of the Banks loan portfolio away from
consumer loans and mortgages to commercial real estate loans. 
 Provision for Loan Losses. In 2003, the Bank recorded a provision of loan losses of $487,700 compared
to $435,000 for 2002. 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 1.13% of gross
loans. 
 Noninterest Income. Noninterest income increased 34.1% in 2003. As a percentage of average
assets, noninterest income was 1.02% for 2003 and 0.92% for 2002. Service
charges on deposits increased $223,900 during 2003. This increase resulted
from services related to overdraft privileges offered by the Bank.
Opportunities to improve such fee income are continuously reviewed and weighed
against competitive pressures in the local market. Other income includes
$106,000 for gains on the sale of investment securities during 2003. No such
gains were recognized in 2002. Other income also includes $127,000 recorded in
2003 for earnings on $2.6 million in Bank-owned life insurance purchased in
April 2002. Earnings on this insurance totaled $98,000 in 2002. 
 Noninterest Expenses. Noninterest expenses remained flat during 2003 at $4,959,000 as compared
to $4,961,000 in 2002. Management concentrated on expense control in 2003.
The ratio of noninterest expense as a percentage of average assets was 2.8% for
2003 and 3.3% for 2002. Salaries and employee benefits, which comprise over
50% of total noninterest expense, increased 1.99% in 2003. The overall
increase of $100,000 in occupancy expenses is primarily due to the overhead
related to the addition of two new branches during 2002. One of these branches
did not open until October 2002. Decreases in 2003 for advertising,
professional fees and operating supplies relate to start up expenses incurred
in 2002 for the opening of the new branches. Noninterest expense in 2002 also
includes a net $71,000 loss on the sale of other real estate. 16




---



##### Table of Contents



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 35.5%
in 2003, and 36.6% in 2002. 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: 17




---



##### 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
    
    
    
    3.24
    %
    
    
    436
    
    
    
    12,147
    
    
    
    5.04
    %
    
    
    612
    
    
    
    67
    
    
    
    (243
    )
    
    
    (176
    )Federal funds sold and other
    
    
    9,694
    
    
    
    2.59
    %
    
    
    251
    
    
    
    7,592
    
    
    
    1.49
    %
    
    
    113
    
    
    
    31
    
    
    
    107
    
    
    
    138Total interest-earning assets
    
    
    166,963
    
    
    
    6.29
    %
    
    
    10,504
    
    
    
    134,960
    
    
    
    7.12
    %
    
    
    9,603
    
    
    
    2,300
    
    
    
    (1,399
    )
    
    
    901Cash and due from banks
    
    
    5,076
    
    
    
    
    
    
    
    
    
    
    
    4,877Other assets
    
    
    8,363
    
    
    
    
    
    
    
    
    
    
    
    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
    %
    
    
    1,522
    
    
    
    38,132
    
    
    
    3.36
    %
    
    
    1,280
    
    
    
    450
    
    
    
    (208
    )
    
    
    242Total interest-bearing deposits
    
    
    130,705
    
    
    
    2.23
    %
    
    
    2,912
    
    
    
    103,845
    
    
    
    2.57
    %
    
    
    2,668
    
    
    
    773
    
    
    
    (529
    )
    
    
    244Other 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
    
    
    
    822
    
    
    
    (585
    )
    
    
    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
    
    
    
    
    
    
    
    
    
    $
    6,755
    
    
    
    
    
    
    
    
    
    
    $
    6,091
    
    
    
    1,478
    
    
    
    (814
    )
    
    
    664Net interest margin (5)
    
    
    
    
    
    
    4.05
    %
    
    
    
    
    
    
    
    
    
    
    4.51
    %
  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
$535,000 in 2003 and $311,000 in 2002.3
    
    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. 18




---



##### 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, 2002
    
    December 31, 2001
    
    2002/2001 ChangeAverage
    
    Interest
    
    Revenue/
    
    Average
    
    Interest
    
    Revenue/
    
    Due to
    
    Due toBalance
    
    Rate
    
    Expense
    
    Balance
    
    Rate
    
    Expense
    
    Volume
    
    Rate (1)
    
    TotalGross loans
(2, 3 and 4)
    
    $
    115,221
    
    
    
    7.71
    %
    
    
    8,878
    
    
    
    103,983
    
    
    
    9.21
    %
    
    
    9,579
    
    
    
    1,035
    
    
    
    (1,736
    )
    
    
    (701
    )Investment securities (4)
    
    
    12,147
    
    
    
    5.04
    %
    
    
    612
    
    
    
    9,875
    
    
    
    5.93
    %
    
    
    586
    
    
    
    135
    
    
    
    (109
    )
    
    
    26Federal funds sold and other
    
    
    7,592
    
    
    
    1.49
    %
    
    
    113
    
    
    
    6,397
    
    
    
    3.56
    %
    
    
    228
    
    
    
    43
    
    
    
    (158
    )
    
    
    (115
    )Total interest-earning assets
    
    
    134,960
    
    
    
    7.12
    %
    
    
    9,603
    
    
    
    120,255
    
    
    
    8.64
    %
    
    
    10,393
    
    
    
    1,213
    
    
    
    (2,003
    )
    
    
    (790
    )Cash and due from banks
    
    
    4,877
    
    
    
    
    
    
    
    
    
    
    
    3,543Other assets
    
    
    9,448
    
    
    
    
    
    
    
    
    
    
    
    6,731Allowance for loan losses
    
    
    (1,311
    )
    
    
    
    
    
    
    
    
    
    
    (1,107
    )Total assets
    
    $
    147,974
    
    
    
    
    
    
    
    
    
    
    
    129,422Deposits:NOW and money market investments
    
    $
    22,368
    
    
    
    1.29
    %
    
    
    288
    
    
    
    20,662
    
    
    
    2.87
    %
    
    
    594
    
    
    
    49
    
    
    
    (355
    )
    
    
    (306
    )Savings
    
    
    14,626
    
    
    
    1.72
    %
    
    
    251
    
    
    
    10,040
    
    
    
    2.60
    %
    
    
    261
    
    
    
    119
    
    
    
    (129
    )
    
    
    (10
    )Time deposit is $100,000 and over
    
    
    28,719
    
    
    
    2.96
    %
    
    
    849
    
    
    
    23,834
    
    
    
    4.90
    %
    
    
    1,167
    
    
    
    239
    
    
    
    (557
    )
    
    
    (318
    )Other time deposits
    
    
    38,132
    
    
    
    3.36
    %
    
    
    1,280
    
    
    
    35,841
    
    
    
    5.22
    %
    
    
    1,872
    
    
    
    120
    
    
    
    (712
    )
    
    
    (592
    )Total interest-bearing deposits
    
    
    103,845
    
    
    
    2.57
    %
    
    
    2,668
    
    
    
    90,377
    
    
    
    4.31
    %
    
    
    3,894
    
    
    
    527
    
    
    
    (1,753
    )
    
    
    (1,226
    )Other borrowings
    
    
    18,893
    
    
    
    4.47
    %
    
    
    844
    
    
    
    15,939
    
    
    
    5.37
    %
    
    
    856
    
    
    
    159
    
    
    
    (171
    )
    
    
    (12
    )Total interest-bearing liabilities
    
    
    122,738
    
    
    
    2.86
    %
    
    
    3,512
    
    
    
    106,316
    
    
    
    4.47
    %
    
    
    4,750
    
    
    
    734
    
    
    
    (1,972
    )
    
    
    (1,238
    )Non interest-bearing liabilities
    
    
    15,900
    
    
    
    
    
    
    
    
    
    
    
    13,468
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    138,638
    
    
    
    
    
    
    
    
    
    
    
    119,784Shareholders equity
    
    
    9,336
    
    
    
    
    
    
    
    
    
    
    
    9,638Total liabilities and
shareholders equity
    
    $
    147,974
    
    
    
    
    
    
    
    
    
    
    
    129,422Net interest income
    
    
    
    
    
    
    
    
    
    $
    6,091
    
    
    
    
    
    
    
    
    
    
    $
    5,643
    
    
    
    479
    
    
    
    (31
    )
    
    
    448Net interest margin (5)
    
    
    
    
    
    
    4.51
    %
    
    
    
    
    
    
    
    
    
    
    4.69
    %
  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 $423,000 in 2002 and $509,000 in 2001.3
    
    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. 19




---



##### Table of Contents



Investment Portfolio The carrying value of securities at December 31 is summarized as follows: Category December 312003
    
    2002($ in thousands)Available for sale:U.S. Government securities
    
    $
    999
    
    
    $
    4,578Mortgage-backed
    
    
    11,371
    
    
    
    3,664Tax exempt
    
    
    2,145
    
    
    
    750Total
    
    $
    14,515
    
    
    $
    8,992
 The following table presents the carrying value by maturity
distribution of debt securities along with weighted average yields
thereon as of December 31, 2003: Within
    
    1-5
    
    Beyond($ in thousands)
    
    1 Year
    
    Years
    
    5 Years
    
    TotalU.S. Government securities
    
    $
    999
    
    
    $
    
    
    
    $
    
    
    
    $
    999Tax exempt securities
    
    
    
    
    
    
    553
    
    
    
    1,592
    
    
    
    2,145$
    999
    
    
    $
    553
    
    
    $
    1,592
    
    
    $
    3,144Weighted average yield (tax equivalent)
    
    
    0.96
    %
    
    
    2.63
    %
    
    
    5.11
    %
    
    
    3.34
    %Mortgage-backed
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,371Weighted average yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.82
    %
 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: 2003
    
    2002($ in thousands)Domestic:Commercial, financial and agricultural
    
    $
    19,452
    
    
    $
    15,765Real estate  construction
    
    
    20,897
    
    
    
    7,770Real estate
 1 to 4 family residential
    
    
    46,105
    
    
    
    39,362Real estate  other
    
    
    60,860
    
    
    
    53,825Consumer loans
    
    
    5,998
    
    
    
    7,666Total loans
    
    $
    153,312
    
    
    $
    124,388Allowance for loan losses
    
    
    (1,736
    )
    
    
    (1,351
    )Total (net of allowance)
    
    $
    151,576
    
    
    $
    123,037
 The following is a presentation of an analysis of maturities of loans as of December 31, 2003: 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
    
    $
    10,537
    
    
    $
    7,763
    
    
    $
    1,242
    
    
    $
    19,452Real estate
 construction
    
    
    13,016
    
    
    
    5,301
    
    
    
    2,580
    
    
    
    20,897Total
    
    $
    23,553
    
    
    $
    12,974
    
    
    $
    3,822
    
    
    $
    40,349
 20




---



##### 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, 2003 (in
thousands): Loans due after 1 year with predetermined interest rates
    
    $
    8,232Loans due after 1 year with floating interest rates
    
    $
    8,564
 The following table presents information regarding nonaccrual, past
due and restructured loans at the dates indicated: December 31,2003
    
    2002Loans accounted for on a non-accrual basis:Number
    
    
    5
    
    
    
    3Amount
    
    $
    227,000
    
    
    $
    17,000Accruing loans (including consumer loans) which are
contractually past due 90 days or more as to principal
and interest payments:Number
    
    
    1
    
    
    
    5Amount
    
    $
    33,000
    
    
    $
    169,000Loans defined as troubled debt restructuringsNumber
    
    
    0
    
    
    
    0Amount
    
    $
    0
    
    
    $
    0
 As of December 31, 2003, 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. 21




---



##### 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 31,2003
    
    2002Balance at beginning of period
    
    $
    1,351
    
    
    $
    1,244Charge-offs: Real estate
    
    
    (33
    )
    
    
    (264
    )Consumer
    
    
    (93
    )
    
    
    (104
    )(126
    )
    
    
    (368
    )Recoveries
    
    
    23
    
    
    
    40Net Charge-offs
    
    
    (103
    )
    
    
    (328
    )Additions charged to operations
    
    
    488
    
    
    
    435Balance at end of period
    
    $
    1,736
    
    
    $
    1,351Ratio of net charge-offs during the period to
average loans outstanding during the period
    
    
    .07
    %
    
    
    .28
    %
 At December 31, 2003 and 2002 the allowance was allocated as follows ($
in thousands): 2003
    
    2002Percentage of
    
    
    
    
    
    Percentage ofloans in each
    
    
    
    
    
    loans in eachcategory to
    
    
    
    
    
    category toAmount
    
    total loans
    
    Amount
    
    total loansCommercial, financial and agricultural
    
    $
    72
    
    
    
    12
    %
    
    $
    56
    
    
    
    13
    %Real
estate  construction
    
    
    289
    
    
    
    14
    %
    
    
    225
    
    
    
    6
    %Real
estate  mortgage
    
    
    293
    
    
    
    30
    %
    
    
    228
    
    
    
    32
    %Real
estate  other
    
    
    433
    
    
    
    40
    %
    
    
    337
    
    
    
    43
    %Consumer loans
    
    
    649
    
    
    
    4
    %
    
    
    505
    
    
    
    6
    %Total
    
    $
    1,736
    
    
    
    100
    %
    
    $
    1,351
    
    
    
    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, 2003,
64% 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, 2003, 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. 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. 22




---



##### Table of Contents



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 31,2003
    
    2002Average
    
    
    
    
    
    AverageAverage
    
    Rate
    
    Average
    
    RateAmount
    
    Paid
    
    Amount
    
    PaidNoninterest-bearing
    
    $
    16,256
    
    
    Not applicable
    
    $
    14,408
    
    
    Not applicableInterest-bearing demand
    
    
    25,025
    
    
    
    0.97
    %
    
    
    22,368
    
    
    
    1.29
    %Savings
    
    
    16,981
    
    
    
    1.07
    %
    
    
    14,626
    
    
    
    1.72
    %Certificates of deposits
    
    
    88,699
    
    
    
    2.81
    %
    
    
    66,851
    
    
    
    3.18
    %
 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, 2003 (in thousands): Certificates of Deposit3 months or less
    
    $
    16,8543-12 months
    
    
    16,409over 12 months
    
    
    11,385Total
    
    $
    44,648
 Return on Equity and Assets Returns on average consolidated assets and average consolidated
equity for the periods indicated are as follows: Years ended December 31,2003
    
    2002Return on average assets
    
    
    1.1
    %
    
    
    0.8
    %Return on average equity
    
    
    19.4
    %
    
    
    13.5
    %Average equity to average assets ratio
    
    
    5.5
    %
    
    
    6.0
    %Dividend payout ratio
    
    
    27.1
    %
    
    
    41.4
    %
 Short-Term Borrowings The following table summarizes short-term borrowings (securities
sold under agreements to repurchase) at December 31, 2003 and 2002: ($ in thousands)2003
    
    2002Amount outstanding at December 31
    
    $
    1,920
    
    
    $
    2,374Weighted average interest rate at year end
    
    
    0.66
    %
    
    
    1.29
    %Maximum month-end balance during the year
    
    
    3,186
    
    
    
    3,802Average amount outstanding during the year
    
    
    2,497
    
    
    
    2,768Weighted average interest rate during the year
    
    
    0.95
    %
    
    
    1.51
    %
 23




---



##### Table of Contents



ITEM 7. Financial Statements The following financial statements and reports of independent auditors are included herein: Reports of Independent AuditorsConsolidated Balance Sheets, December 31, 2003 and 2002Consolidated Statements of Operations, Years
Ended December 31, 2003 and 2002Consolidated Statements of Changes in Shareholders Equity, Years
Ended December 31, 2003 and 2002Consolidated Statements of Cash Flows, Years
Ended December 31, 2003 and 2002Notes to Consolidated Financial Statements, December 31, 2003 and 2002
 24




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
ROGERSVILLE, TENNESSEE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 CONTENTS REPORT OF INDEPENDENT AUDITORS
    
    
    F-2CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS
    
    
    F-3CONSOLIDATED STATEMENTS OF OPERATIONS
    
    
    F-4CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
    
    
    F-5CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    F-6NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-7


F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS The Board of Directors
First Community Corporation
Rogersville, Tennessee We have audited the consolidated balance sheets of First Community Corporation
as of December 31, 2003 and 2002, and the related consolidated statements of
operations, changes in shareholders equity, and cash flows for the years then
ended. 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 generally
accepted in the United States of America. 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, 2003 and 2002, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. /s/ Crowe Chizek and Company LLC Brentwood, Tennessee
February 20, 2004 F-2




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002 2003
    
    2002ASSETSCash and due from banks
    
    $
    2,763,862
    
    
    $
    7,263,832Federal funds sold
    
    
    6,572,235
    
    
    
    13,705,213Cash and cash equivalents
    
    
    9,336,097
    
    
    
    20,969,045Securities available for sale
    
    
    14,515,480
    
    
    
    8,991,657Loans, net (of allowance of $1,735,980 and $1,350,662)
    
    
    151,576,009
    
    
    
    123,037,394Premises and equipment
    
    
    5,843,051
    
    
    
    6,045,702Accrued interest receivable
    
    
    1,154,997
    
    
    
    1,110,525Federal Home Loan Bank and Bankers Bank stock
    
    
    1,578,615
    
    
    
    1,520,215Company owned life insurance
    
    
    3,473,943
    
    
    
    3,292,594Computer software, net of amortization
    
    
    449,170
    
    
    
    471,308Other assets
    
    
    826,978
    
    
    
    961,062$
    188,754,340
    
    
    $
    166,399,502LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesDepositsNoninterest-bearing
    
    $
    16,363,536
    
    
    $
    17,579,837Interest-bearing
    
    
    141,861,832
    
    
    
    118,593,492Total deposits
    
    
    158,225,368
    
    
    
    136,173,329Securities sold under agreement to repurchase
    
    
    1,920,416
    
    
    
    2,372,813Federal Home Loan Bank advances
    
    
    12,000,000
    
    
    
    12,000,000Subordinated debentures
    
    
    4,000,000
    
    
    
    4,000,000Note payable
    
    
    350,000
    
    
    
    803,000Accrued interest payable
    
    
    567,664
    
    
    
    544,774Dividends payable
    
    
    132,366
    
    
    
    131,023Other liabilities
    
    
    914,721
    
    
    
    1,137,365Total liabilities
    
    
    178,110,535
    
    
    
    157,162,304Shareholders equityPreferred stock, no par value. Authorized 1,000,000
shares; none issued
    
    
    
    
    
    
    Common stock, no par value. Authorized 10,000,000
shares; issued 1,890,945 shares in 2003 and 1,871,755
shares in 2002
    
    
    7,182,967
    
    
    
    6,984,371Retained earnings
    
    
    3,530,093
    
    
    
    2,116,734Accumulated other comprehensive income (loss)
    
    
    (69,255
    )
    
    
    136,093Total shareholders equity
    
    
    10,643,805
    
    
    
    9,237,198$
    188,754,340
    
    
    $
    166,399,502
 See accompanying notes to consolidated financial statements. F-3




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003 and 2002 2003
    
    2002Interest incomeLoans, including fees
    
    $
    9,817,400
    
    
    $
    8,878,238Securities
Taxable
    
    
    376,477
    
    
    
    467,647Non-taxable
    
    
    59,349
    
    
    
    50,889Federal funds sold and other
    
    
    122,504
    
    
    
    178,446Total interest income
    
    
    10,375,730
    
    
    
    9,575,220Interest expenseDeposits
    
    
    2,912,126
    
    
    
    2,668,558Federal Home Loan Bank advances
    
    
    591,708
    
    
    
    574,104Subordinated debentures
    
    
    201,595
    
    
    
    224,799Other
    
    
    43,321
    
    
    
    44,075Total interest expense
    
    
    3,748,750
    
    
    
    3,511,536Net interest income
    
    
    6,626,980
    
    
    
    6,063,684Provision for loan losses
    
    
    487,747
    
    
    
    435,399Net interest income after provision for loan losses
    
    
    6,139,233
    
    
    
    5,628,285Noninterest incomeService charges on deposit accounts
    
    
    1,134,043
    
    
    
    910,123Mortgage banking activities
    
    
    114,660
    
    
    
    122,468Net gain on sale of securities
    
    
    105,858
    
    
    
    Other
    
    
    475,213
    
    
    
    332,244Total noninterest income
    
    
    1,829,774
    
    
    
    1,364,835Noninterest expenseSalaries and employee benefits
    
    
    2,572,392
    
    
    
    2,524,498Occupancy
    
    
    505,920
    
    
    
    405,847Furniture and equipment
    
    
    413,633
    
    
    
    358,057Advertising and public relations
    
    
    66,701
    
    
    
    158,201Professional services
    
    
    178,254
    
    
    
    210,287Operating supplies
    
    
    151,723
    
    
    
    234,687Other
    
    
    1,070,453
    
    
    
    1,068,926Total noninterest expense
    
    
    4,959,076
    
    
    
    4,960,503Income before income taxes
    
    
    3,009,931
    
    
    
    2,032,617Income tax expense
    
    
    1,068,974
    
    
    
    743,181Net income
    
    $
    1,940,957
    
    
    $
    1,289,436Earnings per common shareBasic
    
    $
    1.03
    
    
    $
    0.67Diluted
    
    
    1.03
    
    
    
    0.67Average common shares outstandingBasic
    
    
    1,881,269
    
    
    
    1,912,311Diluted
    
    
    1,888,869
    
    
    
    1,930,536
 See accompanying notes to consolidated financial statements. F-4




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31, 2003 and 2002 AccumulatedOther
    
    TotalCommon
    
    Retained
    
    Comprehensive
    
    Shareholders'Shares
    
    Stock
    
    Earnings
    
    Income (Loss)
    
    EquityBalance, January 1, 2002
    
    
    1,917,167
    
    
    $
    7,188,275
    
    
    $
    1,957,244
    
    
    $
    33,339
    
    
    $
    9,178,858Purchase and retirement of common stock
    
    
    (45,868
    )
    
    
    (206,406
    )
    
    
    (596,284
    )
    
    
    
    
    
    
    (802,690
    )Issuance of 456 common stock in connection
with stock option plans
    
    
    456
    
    
    
    2,502
    
    
    
    
    
    
    
    
    
    
    
    2,502Dividends  $.28 per share
    
    
    
    
    
    
    
    
    
    
    (533,662
    )
    
    
    
    
    
    
    (533,662
    )Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    1,289,436
    
    
    
    
    
    
    
    1,289,436Other comprehensive incomeChange in unrealized gains on securities
available for sale, net of tax of $64,044
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,754
    
    
    
    102,754Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,392,190Balance, December 31, 2002
    
    
    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 gains on securities
available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140,023
    )
    
    
    (140,023
    )Reclassification adjustment for gains
included in net income,
net of tax of $40,533
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,325
    )
    
    
    (65,325
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,735,609Balance, December 31, 2003
    
    
    1,890,945
    
    
    $
    7,182,967
    
    
    $
    3,530,093
    
    
    $
    (69,255
    )
    
    $
    10,643,805
 See accompanying notes to consolidated financial statements. F-5




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003 and 2002 2003
    
    2002Cash flows from operating activities:Net income
    
    $
    1,940,957
    
    
    $
    1,289,436Adjustments to reconcile net income to net
cash provided by operating activitiesDepreciation and amortization
    
    
    611,109
    
    
    
    522,494Net amortization (accretion) of securities
    
    
    159,850
    
    
    
    38,219Provision for loan losses
    
    
    487,747
    
    
    
    435,399FHLB stock dividends
    
    
    (58,400
    )
    
    
    (64,500
    )Net realized gain on sales of securities
    
    
    (105,858
    )
    
    
    Loss on sale of real estate owned, net
    
    
    490
    
    
    
    71,272Deferred income taxes (benefits)
    
    
    (211,000
    )
    
    
    51,000Non cash proceeds from issuance of common stock
    
    
    125,375
    
    
    
    Change in accrued interest receivable and other assets
    
    
    83,162
    
    
    
    (232,989
    )Change in accrued interest payable and other liabilities
    
    
    (181,102
    )
    
    
    280,488Net cash from operating activities
    
    
    2,852,330
    
    
    
    2,390,819Cash flows from investing activities:Purchases of securities available for sale
    
    
    (16,526,759
    )
    
    
    (4,433,236
    )Proceeds from maturities and redemptions of
securities available for sale
    
    
    7,671,522
    
    
    
    6,088,561Proceeds from sales of securities available for sale
    
    
    2,944,659
    
    
    
    Net increase in loans
    
    
    (29,026,362
    )
    
    
    (15,776,580
    )Investment in life insurance
    
    
    
    
    
    
    (2,600,000
    )Proceeds from the sale of other real estate
    
    
    144,374
    
    
    
    1,243,804Net purchases of fixed assets and computer software
    
    
    (386,320
    )
    
    
    (2,795,539
    )Net cash from investing activities
    
    
    (35,178,886
    )
    
    
    (18,272,990
    )Cash flows from financing activities:Cash dividends
    
    
    (526,255
    )
    
    
    (536,841
    )Proceeds from note payable
    
    
    
    
    
    
    803,000Repayments of note payable
    
    
    (453,000
    )
    
    
    (124,000
    )Proceeds from FHLB advances
    
    
    13,170,000
    
    
    
    1,500,000Repayments from FHLB advances
    
    
    (13,170,000
    )
    
    
    (1,500,000
    )Increase in deposits
    
    
    22,052,039
    
    
    
    30,075,312Change in securities sold under
agreement to repurchase
    
    
    (452,397
    )
    
    
    (1,145,145
    )Purchase and retirement of common stock
    
    
    
    
    
    
    (802,690
    )Proceeds from issuance of common stock
    
    
    73,221
    
    
    
    2,502Net cash from financing activities
    
    
    20,693,608
    
    
    
    28,272,138Net change in cash and cash equivalents
    
    
    (11,632,948
    )
    
    
    12,389,967Cash and cash equivalents at beginning of period
    
    
    20,969,045
    
    
    
    8,579,078Cash and cash equivalents at end of period
    
    $
    9,336,097
    
    
    $
    20,969,045Supplemental disclosures of cash flow information:Cash paid during year for:Interest
    
    $
    3,725,860
    
    
    $
    3,608,679Income taxes
    
    
    1,114,845
    
    
    
    921,000Supplemental noncash disclosures:Transfers from loans to repossessed assets
    
    
    128,918
    
    
    
    1,329,374
 See accompanying notes to consolidated financial statements. F-6




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General: First Community Corporation, through its subsidiary, First Community
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, real estate mortgage
and installment 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. 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 and fair values of financial instruments 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. 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.   (Continued) F-7




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 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 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. Other Real Estate: Other real estate, which consists of properties acquired
through foreclosure, is recorded at the lower of the outstanding loan amount or
fair value, determined by appraisal, at the date of foreclosure. Declines in
value resulting from reappraisals, as well as losses resulting from disposition
are charged to operations.   (Continued) F-8




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) 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. 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. 2003
    
    2002Net income as reported
    
    $
    1,940,957
    
    
    $
    1,289,436Deduct: Stock-based compensation expense determined
under fair value based method, net of tax
    
    
    5,958
    
    
    
    7,902Pro forma net income
    
    $
    1,934,999
    
    
    $
    1,281,534Basic earnings per share as reported
    
    
    1.03
    
    
    
    0.67Pro forma basic earnings per share
    
    
    1.03
    
    
    
    0.67Diluted earnings per share as reported
    
    
    1.03
    
    
    
    0.67Pro forma diluted earnings per share
    
    
    1.03
    
    
    
    0.66
 No options were granted in 2003 or 2002. 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.   (Continued) F-9




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) 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. Employee Benefits: The Bank maintains a 401(k) profit-sharing plan that covers
substantially all employees. 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. Adoptions of New Accounting Standards: During 2003, the Company adopted FASB
Statement 143, Accounting for Asset Retirement Obligations, FASB Statement 145,
Rescission of FAS Statement 4, 44, and 64, Amendment of FAS Statement 13, and
Technical Corrections,FASB Statement 146, Accounting for Costs Associated with
Exit or Disposal Activities,FASB Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equities, FASB Statement 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits, FASB Interpretation 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, and FASB Interpretation
46, Consolidation of Variable Interest Entities. Adoption of the new standards
did not materially affect the Companys operating results or financial
condition. Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.   (Continued) F-10




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 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
    
    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
    )2002U.S. Government agency securities
    
    $
    4,577,355
    
    
    $
    77,355
    
    
    $
    Mortgage-backed securities
    
    
    3,664,315
    
    
    
    132,953
    
    
    
    Tax exempt securities
    
    
    749,987
    
    
    
    10,228
    
    
    
    Total
    
    $
    8,991,657
    
    
    $
    220,536
    
    
    $
    
 The fair value of securities at December 31, 2003, 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
    
    $
    1,552,427Due after five through ten years
    
    
    968,257Due after ten years
    
    
    623,610Mortgage-backed securities
    
    
    11,371,186Total
    
    $
    14,515,480
 In 2003, the Company recognized $105,858 in gross realized gains and $0 gross
realized losses from the sale of securities. The Company had no gross realized
gains or losses from the sale or redemptions of securities in 2002. Securities pledged at year-end 2003 and 2002 had a carrying amount of
$7,565,000 and $7,221,000 and were pledged to secure public deposits and
repurchase agreements.   (Continued) F-11




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 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,
2003: Less than 12 MonthsFair
    
    UnrealizedDescription of Securities
    
    Value
    
    LossU.S. Government
agency securities
    
    $
    999,500
    
    
    $
    (313
    )Mortgage-backed
securities
    
    
    9,040,389
    
    
    
    (133,803
    )Tax exempt securities
    
    
    575,240
    
    
    
    (16,828
    )Total temporarily
impaired
    
    $
    10,615,129
    
    
    $
    (150,944
    )
 Unrealized losses on securities have not been recognized into income because
the securities are of high credit quality, 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 securities approach their maturity date and/or market rates
change. NOTE 3  LOANS A summary of loans outstanding by category at December 31, 2003 and 2002
follows: 2003
    
    2002Commercial, financial and agricultural
    
    $
    19,451,822
    
    
    $
    15,764,793Real estate  construction
    
    
    20,897,201
    
    
    
    7,770,412Real estate  1 to 4 family residential properties
    
    
    46,104,920
    
    
    
    39,361,599Real estate  other
    
    
    60,859,875
    
    
    
    53,825,296Consumer
    
    
    5,998,171
    
    
    
    7,665,956153,311,989
    
    
    
    124,388,056Less: Allowance for loan losses
    
    
    (1,735,980
    )
    
    
    (1,350,662
    )Loans, net
    
    $
    151,576,009
    
    
    $
    123,037,394
   (Continued) F-12




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 Nonperforming loans were as follows: 2003
    
    2002Loans past due over 90 days still on accrual
    
    $
    33,000
    
    
    $
    169,000Nonaccrual loans
    
    
    227,000
    
    
    
    17,000
 At December 31, 2003 and 2002, the Bank had loans amounting to $260,000 and
$186,000, respectively that were specifically classified as impaired. The
allowance for loan losses related to impaired loans amounted to approximately
$39,000 and $28,000 at December 31, 2003 and 2002, respectively. The average
balance of these loans amounted to approximately $156,000 and $462,000 for the
years ended December 31, 2003 and 2002. The impact on net interest income of
these loans was not material to the Banks results of operations. NOTE 4  ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses are as follows: 2003
    
    2002Balance at beginning of period
    
    $
    1,350,662
    
    
    $
    1,243,496Provision for loan losses
    
    
    487,747
    
    
    
    435,399Loans charged off
    
    
    (125,814
    )
    
    
    (368,376
    )Recoveries
    
    
    23,385
    
    
    
    40,143Balance at end of period
    
    $
    1,735,980
    
    
    $
    1,350,662
 NOTE 5  PREMISES AND EQUIPMENT Following is a summary of premises and equipment at December 31: 2003
    
    2002Land
    
    $
    838,092
    
    
    $
    835,667Building
    
    
    5,376,400
    
    
    
    5,260,786Furniture and equipment
    
    
    2,355,026
    
    
    
    2,172,9268,569,518
    
    
    
    8,269,379Less: Accumulated depreciation
    
    
    2,726,467
    
    
    
    2,223,677$
    5,843,051
    
    
    $
    6,045,702
 Depreciation expense totaled $502,790 and $422,228 for 2003 and 2002.   (Continued) F-13




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 The Bank leases space for one of its branches under an operating lease. Rental
expense was $25,800 and $23,824 for 2003 and 2002. 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:
    
    2003
    
    2002Noninterest-bearing
    
    $
    16,363,536
    
    
    $
    17,579,837Interest-bearing demand
    
    
    23,678,083
    
    
    
    24,028,322Savings
    
    
    15,863,335
    
    
    
    15,948,681Certificates of deposit of $100,000 or more
    
    
    44,648,410
    
    
    
    32,346,849Other time
    
    
    57,672,004
    
    
    
    46,269,640$
    158,225,368
    
    
    $
    136,173,329
 Interest expense on deposits of $100,000 or more amounted to $966,533 in 2003
and $848,537 in 2002. Scheduled maturities of time deposits for the next five years were as follows: 2004
    
    $
    67,537,3712005
    
    
    17,205,7702006
    
    
    10,494,6492007
    
    
    5,103,5092008
    
    
    1,943,009Thereafter
    
    
    36,106$
    102,320,414
 NOTE 7  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are secured by securities with a
carrying amount of $5,296,000 and $4,813,000 at year-end 2003 and 2002. 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: 2003
    
    2002Average daily balance during the year
    
    $
    2,497,000
    
    
    $
    2,768,000Average interest rate during the year
    
    
    .95
    %
    
    
    1.51
    %Maximum month-end balance during the year
    
    
    3,186,000
    
    
    
    3,802,000Weighted average interest rate at year-end
    
    
    .66
    %
    
    
    1.29
    %
   (Continued) F-14




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 8  INCOME TAXES The components of income tax expense for the years ended December 31 were as follows: 2003
    
    2002CurrentFederal
    
    $
    1,066,293
    
    
    $
    572,403State
    
    
    213,681
    
    
    
    119,7781,279,974
    
    
    
    692,181DeferredFederal
    
    
    (176,336
    )
    
    
    39,014State
    
    
    (34,664
    )
    
    
    11,986(211,000
    )
    
    
    51,000$
    1,068,974
    
    
    $
    743,181
 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: 2003
    
    2002Tax at statutory rate
    
    $
    1,023,377
    
    
    $
    691,090Increase (decrease) resulting from
State income tax, net of federal effect
    
    
    118,000
    
    
    
    87,000Tax-exempt interest
    
    
    (20,000
    )
    
    
    (20,000
    )Other, net
    
    
    (52,403
    )
    
    
    (14,909
    )$
    1,068,974
    
    
    $
    743,181
   (Continued) F-15




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 8  INCOME TAXES(Continued) The tax effect of each type of temporary difference that gives rise to deferred
tax assets and liabilities is as follows: 2003
    
    2002Deferred tax assets:Provision for loan losses
    
    $
    550,000
    
    
    $
    411,000Deferred compensation
    
    
    98,000
    
    
    
    73,000Other
    
    
    59,000
    
    
    
    2,000707,000
    
    
    
    486,000Deferred tax liabilities:Fixed assets
    
    
    (311,000
    )
    
    
    (323,000
    )Federal Home Loan Bank stock dividend
    
    
    (192,000
    )
    
    
    (170,000
    )Unrealized gains on securities
    
    
    (43,000
    )
    
    
    (84,000
    )(546,000
    )
    
    
    (577,000
    )Net deferred tax asset (liability)
    
    $
    161,000
    
    
    $
    (91,000
    )
 NOTE 9  RELATED PARTY TRANSACTIONS Loans to principal officers, directors, and their affiliates in 2003 were as
follows. Beginning balance
    
    $
    4,982,296New loans
    
    
    1,555,121Effect of changes in related parties
    
    
    (157,527
    )Repayments
    
    
    (895,811
    )Ending balance
    
    $
    5,484,079
 Deposits from principal officers, directors, and their affiliates at year-end
2003 were $963,907. NOTE 10  FEDERAL HOME LOAN BANK ADVANCES At year-end, advances from the Federal Home Loan Bank were as follows. 2003
    
    2002Maturities March 2010 through March 2011,
primarily fixed rates from 4.28% to 6.26%,
averaging 4.78%
    
    $
    12,000,000
    
    
    $
    12,000,000
 Each advance is payable at its maturity date, with a prepayment penalty. The
advances were collateralized by $15,000,000 and $16,200,000 of first mortgage
loans under a blanket lien arrangement at year-end 2003 and 2002.   (Continued) F-16




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 11  SUBORDINATED DEBENTURES AND OTHER DEBT The Company borrowed $4,000,000 of floating rate mandatory redeemable
securities through a special purpose entity as part of a private offering. The
rate was 4.77% at December 31, 2003. The securities mature on December 18,
2031, however, the maturity may be shortened to a date not earlier that
December 18, 2006. They are presented in liabilities on the balance sheet and
count as Tier 1 capital for regulatory capital purposes. Debt issue costs of
$121,000 have been capitalized and are being amortized over the term of the
securities. Prior to 2003, the trust was consolidated in the Companys financial
statements, with the trust preferred securities issued by the trust reported in
liabilities as trust preferred securities and the subordinated debentures
eliminated in consolidation. Under new accounting guidance, the FASB
Interpretation No. 46, as revised in December 2003, the trust is no longer
consolidated with the Company. Accordingly, the Company does not report the
securities issued by the trust as liabilities, and instead reports liabilities
as subordinated debentures issued by the Company and held by the trust, as
these are no longer eliminated in consolidation. Since the amount of the
subordinated debentures and the trust preferred securities was the same, the
effect of no longer consolidating the trust does not change the amounts
reported as the Companys assets, liabilities, equity, or interest expense.
Accordingly, the amounts previously reported as trust preferred securities in
liabilities have been recaptioned subordinated debentures and continue to be
presented in liabilities on the balance sheet. 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 3.00% and 3.271% at
December 31, 2003 and 2002. The line matures in 2004. The balance outstanding
on the line was $350,000 and $803,000 at year-end 2003 and 2002. 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, 2003. No collateral was pledged related to these lines as of
December 31, 2003. 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 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. The board currently has no intent to issue such
preferred stock. During 2000, the Company entered into an agreement with the former President of
the Company to purchase 137,604 shares of Company stock owned by the former
President for $17.50 per share. The shares were purchased in 2000, 2001 and
2002, one-third in each year.   (Continued) F-17




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 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, 2003
and 2002 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, 2003 and 2002 were as follows: To Be Well($ amounts in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action Provisions2003
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal 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
    %2002Total Capital to risk weighted assetsBank
    
    $
    14,769
    
    
    
    11.39
    %
    
    $
    10,378
    
    
    
    8.00
    %
    
    $
    12,972
    
    
    
    10.00
    %Consolidated
    
    
    14,452
    
    
    
    11.10
    %
    
    
    10,413
    
    
    
    8.00
    %
    
    
    13,016
    
    
    
    10.00
    %Tier 1 (Core) Capital to risk weighted assetsBank
    
    $
    13,418
    
    
    
    10.34
    %
    
    $
    5,189
    
    
    
    4.00
    %
    
    $
    7,783
    
    
    
    6.00
    %Consolidated
    
    
    12,110
    
    
    
    9.31
    %
    
    
    5,206
    
    
    
    4.00
    %
    
    
    7,810
    
    
    
    6.00
    %Tier 1 (Core) Capital to average assetsBank
    
    $
    13,418
    
    
    
    8.45
    %
    
    $
    6,355
    
    
    
    4.00
    %
    
    $
    7,944
    
    
    
    5.00
    %Consolidated
    
    
    12,110
    
    
    
    7.59
    %
    
    
    6,383
    
    
    
    4.00
    %
    
    
    7,978
    
    
    
    5.00
    %
 The Bank is also subject to state regulations restricting the amount of
dividends payable to the Company. At year-end 2003, the Bank had $2,715,000 of
retained earnings available for dividends under these regulations.   (Continued) F-18




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 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 225,000 shares by officers and key employees of the Company.
The options become exercisable over 1 to 5 years. No options were granted in
2003 and 2002. 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 2003 or 2002. A summary of the status of the Companys stock option plans for the two years
ended December 31, 2003 and the changes during those years is presented below: Total Option
    
    Average
    
    ExercisableShares
    
    Exercise
    
    OptionsOutstanding
    
    Price
    
    OutstandingOptions outstanding at January 1, 2002
    
    
    44,196
    
    
    $
    8.72
    
    
    
    38,796Options which became exercisable
    
    
    
    
    
    
    11.00
    
    
    
    3,600Options exercised
    
    
    (456
    )
    
    
    5.48
    
    
    
    (456
    )Options outstanding at December 31, 2002
    
    
    43,740
    
    
    
    8.75
    
    
    
    41,940Options which became exercisable
    
    
    
    
    
    
    12.67
    
    
    
    1,800Options exercised
    
    
    (10,690
    )
    
    
    6.85
    
    
    
    (10,690
    )Options outstanding at December 31, 2003
    
    
    33,050
    
    
    $
    8.75
    
    
    
    33,050
 The effect of these options on earnings per common share was to increase
average shares outstanding by 7,600 and 18,225 in 2003 and 2002. There were no
antidilutive options as of December 31, 2003 and 2002. The following table summarizes information about the stock options outstanding
under the Companys plans at December 31, 2003: Exercise
    
    Number
    
    Average
    
    NumberPrice
    
    Outstanding
    
    Remaining Life
    
    Exercisable$
    4.50
    
    
    
    7,844
    
    
    1 years
    
    
    7,8446.00
    
    
    
    1,971
    
    
    3 years
    
    
    1,9717.33
    
    
    
    3,600
    
    
    4 years
    
    
    3,6009.33
    
    
    
    4,935
    
    
    5 years
    
    
    4,93512.67
    
    
    
    8,700
    
    
    6 years
    
    
    8,70013.33
    
    
    
    6,000
    
    
    7 years
    
    
    6,000
   (Continued) F-19




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 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 $29,528 in 2003
and $24,448 in 2002. The Company has a non-qualified deferred compensation arrangement with a former
employee. An actuarially determined 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, which are not deductible by the Corporation for tax purposes
until distributions are made to participants, amounted to $23,000 in 2003 and
$22,000 in 2002. The Company has approved a Supplemental Executive Retirement Plan for key
officers and employees. This plan offers retirement and death benefits to
these officers. Expense related to this plan was $185,000 for 2003. 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 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. 2003
    
    2002Fixed
    
    Variable
    
    Fixed
    
    VariableRate
    
    Rate
    
    Rate
    
    RateCommitments to make loans
    
    $
    2,614,000
    
    
    $
    13,861,000
    
    
    $
    2,287,000
    
    
    $
    7,809,000Unused letters of credit
    
    
    
    
    
    
    3,012,550
    
    
    
    
    
    
    
    496,000
   (Continued) F-20




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 Commitments to make loans are generally made for periods of 1 year or less.
The fixed rate loan commitments have interest rates ranging from 0.00% 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: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    9,336,097
    
    
    $
    9,336,000
    
    
    $
    20,969,045
    
    
    $
    20,969,000Securities
    
    
    14,515,480
    
    
    
    14,515,000
    
    
    
    8,991,657
    
    
    
    8,992,000Loans receivable, net
    
    
    151,576,009
    
    
    
    153,010,000
    
    
    
    123,037,394
    
    
    
    124,133,000Accrued interest receivable
    
    
    1,154,997
    
    
    
    1,155,000
    
    
    
    1,110,525
    
    
    
    1,111,000FHLB and Bankers Bank stock
    
    
    1,578,723
    
    
    
    1,579,000
    
    
    
    1,520,215
    
    
    
    1,520,000Financial liabilitiesDeposits
    
    $
    158,225,368
    
    
    $
    159,997,000
    
    
    $
    136,173,329
    
    
    $
    136,887,000Securities sold under
repurchase agreements
    
    
    1,920,416
    
    
    
    1,920,000
    
    
    
    2,372,813
    
    
    
    2,373,000Borrowings from FHLB
    
    
    12,000,000
    
    
    
    13,047,000
    
    
    
    12,000,000
    
    
    
    13,302,000Subordinated debentures
    
    
    4,000,000
    
    
    
    4,000,000
    
    
    
    4,000,000
    
    
    
    4,000,000Note payable
    
    
    350,000
    
    
    
    350,000
    
    
    
    803,000
    
    
    
    803,000Accrued interest payable
    
    
    567,664
    
    
    
    568,000
    
    
    
    544,744
    
    
    
    545,000Off-balance sheet credit-related items:Loan commitments
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 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 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-21




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 18  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Selected quarterly results of operations for the four quarters ended December
31 are as follows: Three months endedMarch 31
    
    June 30
    
    Sept. 30
    
    Dec. 312003:
    
    (in thousands, except per share amounts)Interest income
    
    $
    2,478
    
    
    $
    2,590
    
    
    $
    2,619
    
    
    $
    2,689Interest expense
    
    
    950
    
    
    
    968
    
    
    
    906
    
    
    
    925Net interest income
    
    
    1,528
    
    
    
    1,622
    
    
    
    1,713
    
    
    
    1,764Provision for loan losses
    
    
    149
    
    
    
    162
    
    
    
    83
    
    
    
    94Other income
    
    
    424
    
    
    
    544
    
    
    
    428
    
    
    
    434Other expense
    
    
    1,285
    
    
    
    1,208
    
    
    
    1,211
    
    
    
    1,255Income before income tax
    
    
    518
    
    
    
    796
    
    
    
    847
    
    
    
    849Income taxes
    
    
    191
    
    
    
    298
    
    
    
    315
    
    
    
    265Net income
    
    $
    327
    
    
    $
    498
    
    
    $
    532
    
    
    $
    584Earnings per common share
    
    $
    .17
    
    
    $
    .27
    
    
    $
    .28
    
    
    $
    .31Diluted earnings per common share
    
    
    .17
    
    
    
    .26
    
    
    
    .28
    
    
    
    .30Cash dividends declared per common share
    
    
    .07
    
    
    
    .07
    
    
    
    .07
    
    
    
    .072002:Interest income
    
    $
    2,347
    
    
    $
    2,350
    
    
    $
    2,428
    
    
    $
    2,450Interest expense
    
    
    857
    
    
    
    832
    
    
    
    888
    
    
    
    934Net interest income
    
    
    1,490
    
    
    
    1,518
    
    
    
    1,540
    
    
    
    1,516Provision for loan losses
    
    
    29
    
    
    
    260
    
    
    
    50
    
    
    
    96Other income
    
    
    257
    
    
    
    341
    
    
    
    352
    
    
    
    414Other expense
    
    
    1,169
    
    
    
    1,042
    
    
    
    1,388
    
    
    
    1,362Income before income tax
    
    
    549
    
    
    
    557
    
    
    
    454
    
    
    
    472Income taxes
    
    
    199
    
    
    
    204
    
    
    
    165
    
    
    
    175Net income
    
    $
    350
    
    
    $
    353
    
    
    $
    289
    
    
    $
    297Earnings per common share
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.15Diluted earnings per common share
    
    
    0.18
    
    
    
    0.18
    
    
    
    0.15
    
    
    
    0.15Cash dividends declared per common share
    
    
    0.07
    
    
    
    0.07
    
    
    
    0.07
    
    
    
    0.07
   (Continued) F-22




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 19  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of First Community Corporation follows. Condensed Balance Sheets,
December 31 2003
    
    2002ASSETSCash and cash equivalents
    
    $
    67,024
    
    
    $
    55,911Investment in banking subsidiary
    
    
    14,686,149
    
    
    
    13,554,167Investment in and advances to other subsidiaries
    
    
    124,000
    
    
    
    124,000Other assets
    
    
    372,998
    
    
    
    561,143Total assets
    
    $
    15,250,171
    
    
    $
    14,295,221LIABILITIES AND EQUITYTrust preferred securities
    
    $
    4,124,000
    
    
    $
    4,124,000Long-term debt
    
    
    350,000
    
    
    
    803,000Accrued expenses and other liabilities
    
    
    132,366
    
    
    
    131,023Shareholders equity
    
    
    10,643,805
    
    
    
    9,237,198Total liabilities and shareholders equity
    
    $
    15,250,171
    
    
    $
    14,295,221
 Condensed Statements of Income
Years ended December 31 2003
    
    2002Dividends from subsidiary
    
    $
    807,599
    
    
    $
    843,662Other income
    
    
    6,062
    
    
    
    6,943Interest expense
    
    
    218,362
    
    
    
    233,742Other expense
    
    
    120,401
    
    
    
    123,490Income before income tax and
undistributed subsidiary income
    
    
    474,898
    
    
    
    493,373Income tax expense (benefit)
    
    
    (128,730
    )
    
    
    (135,748
    )Equity in undistributed subsidiary income
    
    
    1,337,329
    
    
    
    660,315Net income
    
    $
    1,940,957
    
    
    $
    1,289,436
   (Continued) F-23




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 19  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION(Continued) Condensed Statements of
Cash Flows
Years ended December 31 2003
    
    2002Cash flows from operating activitiesNet income
    
    $
    1,940,957
    
    
    $
    1,289,436Adjustments:Equity in undistributed subsidiary income
    
    
    (1,337,329
    )
    
    
    (660,315
    )Change in other assets
    
    
    188,144
    
    
    
    Change in other liabilities
    
    
    
    
    
    
    (111,714
    )Net cash from operating activities
    
    
    791,772
    
    
    
    517,407Cash flows from financing activitiesProceeds of borrowings
    
    
    
    
    
    
    803,000Repayments of borrowings
    
    
    (453,000
    )
    
    
    (124,000
    )Proceeds from stock issuance
    
    
    198,596
    
    
    
    2,502Purchase of common stock
    
    
    
    
    
    
    (802,690
    )Dividends paid
    
    
    (526,255
    )
    
    
    (536,841
    )Net cash from financing activities
    
    
    (780,659
    )
    
    
    (658,029
    )Net change in cash and cash equivalents
    
    
    11,113
    
    
    
    (140,622
    )Beginning cash and cash equivalents
    
    
    55,911
    
    
    
    196,533Ending cash and cash equivalents
    
    $
    67,024
    
    
    $
    55,911
   (Continued) F-24




---



##### Table of Contents



FIRST COMMUNITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 NOTE 20  EARNINGS PER SHARE The factors used in the earnings per share computation follow. 2003
    
    2002BasicNet income
    
    $
    1,940,957
    
    
    $
    1,289,436Weighted average common share outstanding
    
    
    1,881,269
    
    
    
    1,912,311Basic earnings per common share
    
    $
    1.03
    
    
    $
    0.67DilutedNet income
    
    $
    1,940,957
    
    
    $
    1,289,436Weighted average common shares outstanding
for basic earnings per common share
    
    
    1,881,269
    
    
    
    1,912,311Add: Dilutive effects of assumed exercises
of stock options
    
    
    7,600
    
    
    
    18,225Average share and dilutive potential common share
    
    
    1,888,869
    
    
    
    1,930,536Diluted earnings per common share
    
    $
    1.03
    
    
    $
    0.67
 No options were antidilutive for 2003 and 2002.   (Continued) F-25




---



##### 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. The Companys
independent accountants since 1993, Heathcott & Mullaly, P.C., advised the
Company that it would merge with and into the Indianapolis-based national
accounting firm, Crowe Chizek and Company LLP, during 2002, and Crowe Chizek
and Company LLC continued to serve as the Companys independent accountants
during 2003. 
 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 the end of the
period covered by this report. The Company has also evaluated its internal
control over financial reporting (as defined in Rule 13a-15(e) under the
Exchange Act), and there have been no changes in the Companys internal control
over financial reporting during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. 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
registrant will file with the Securities and Exchange Commission not later than
120 days after December 31, 2003 (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. 25




---



##### 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
incorpo rated 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.11
    
    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 LLC31.1*
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)31.2*
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)32.1*
    
    Cerfification of Principal Executive Officer
pursuant to18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Cerfification of Principal Financial Officer
pursuant to18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 * filed herewith (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ending
December 31, 2003. 
 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. 26




---



##### 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. GambleMark A. Gamble, President Date: March 30, 2004 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 Board Date: March 30, 2004  By:
    /s/  Mark A. GambleMark A. Gamble, President and Director Date: March 30, 2004  By:
    /s/  Leland A. DavisLeland A. Davis, Director Date: March 30, 2004  By:
    /s/  Kenneth E. JenkinsKenneth E. Jenkins, Director Date: March 30, 2004  By:
    /s/  David R. JohnsonDr. David R. Johnson, Director Date: March 30, 2004  By:
    /s/  Sidney K. LawsonSidney K. Lawson, Director Date: March 30, 2004  By:
    /s/  A. Max RichardsonA. Max Richardson, Director Date: March 30, 2004 27




---



##### Table of Contents



By:
    /s/  Stewart A. TaylorStewart A. Taylor, Director Date: March 30, 2004  By:
    /s/  Tommy W. YoungTommy W. Young, Director Date: March 30, 2004 28