** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**Form 10-KSB / AMENDMENT NO. 1**

| **(Mark One)** |
|----------------|
|           |   |   |
| ý         |   | Annual Report under Section 13 or 15(d) of the  Securities Exchange Act of 1934 |
|           |   | For the fiscal year ended December 31, 2004 |
| or             |   |   |
|           |   |   |
| o              |   | Transition Report under Section 13 or 15(d) of the  Securities Exchange Act of 1934 |
|           |   | For the transition period  from                               to                               |

 

Commission file number:**000-28344**

 

**First Community Corporation**

(Name of Small Business Issuer in Its Charter)

 

| **South Carolina**                                              | **571010751**                        |
|-----------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) | (I.R.S. Employer Identification No.) |
|                                                            |                                 |
| **5455 Sunset Blvd.,****Lexington, South  Carolina**            | **29072**                            |
| (Address of principal executive offices)                        | (Zip Code)                           |

 

**803-951-2265**

Issuer’s Telephone Number, Including Area Code

 

Securities registered pursuant to Section 12(b) ofthe Act:  None.

Securities registered pursuant to Section 12(g) ofthe Act: Common Stock.

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for past 90days. Yes ý No  o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B in this form, and no disclosure willbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-KSB or any amendment to this Form 10-KSB. ý

The issuer’s revenue for its most recent fiscal yearwas $14,818,945.

The aggregate market value of the voting stock as ofMarch 15, 2005, held by non-affiliates of the registrant based on the closingprice as of March 15, 2005, was $49,977,519.

2,830,962 shares of the issuer’s common stock wereissued and outstanding as of March 15, 2005.

**DocumentsIncorporated by Reference**

Theissuer’s proxy statement for the annual meeting of shareholders to be held onMay 18, 2005 is incorporated by reference in this Form 10-KSB in Part III,Items 9 through 12 and 14.

 

Transitional Small Business DisclosureFormat. (Check one): Yes o  No  ý

 

----

 

**EXPLANATORYNOTE**

 

This 10-KSB/A is being filedto amend Part II, Item 7. Financial Statements, which was filed on March 25,2005.  The company inadvertently failedto include the disclosure requirements as outlined in the paragraphs 21 and 22of the Emerging Issues Task Force consensus number 03-1 “The Meaning ofOther-Than-Temporary Impairment and Its application to Certain Investments”(EITF No. 03-1).  The disclosure requiredby EITF No. 03-1 has been added to Note 4 of the financial statements. No otherchanges have been made to the original 10-KSB for the period ended December 31,2004.

 

2

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**Part II.**

**Item 7.  Financial Statements**

 

REPORT OF INDEPENDENT AUDITOR

 

The Board of Directors

First Community Corporation

Lexington, South Carolina

 

I have audited the accompanying consolidated balancesheets of First Community Corporation as of December 31, 2004 and 2003,and the related consolidated statements of operations, changes in shareholders’equity and comprehensive income, and cash flows for the three years ended December 31,2004. These consolidated financial statements are the responsibility ofmanagement. My responsibility is to express an opinion on these consolidated financialstatements based on my audits.

 

I conducted the audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that I plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.I believe that my audits provide a reasonable basis for my opinion.

 

In my opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidated financialposition of First Community Corporation at December 31, 2004 and 2003 andthe results of its operations and its cash flows for the three years ended December 31,2004, in conformity with generally accepted accounting principles in the UnitedStates of America.

 
| /s/ Clifton D. Bodiford     |   |
|-----------------------------|--------|
| Certified Public Accountant |
| Columbia, SC                |
| March 11, 2005         |

 

33

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**FIRST COMMUNITY CORPORATION**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                              | ** ** | **December 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                              | ** ** | **2004**              | ** **  | **2003** | ** ** |
| ASSETS                                                                                                                                  |       |                  |        |   |   |
| Cash and due  from banks                                                                                                                |       | $                     | 9,391,494   |   | $ | 6,926,341 |   |
| Interest-bearing  bank balances                                                                                                         |       | 803,426               |        | 2,221,397 |   |
| Federal  funds sold and securities purchased under agreements to resell                                                                 |       | 9,130,725             |        | 17,335,461 |   |
| Investment  securities - available for sale                                                                                             |       | 190,010,307           |        | 53,958,799 |   |
| Investment  securities - held to maturity (market value of $6,147,698 and $5,169,282 at December 31,  2004 and 2003, respectively) |       | 6,015,745             |        | 4,994,896 |   |
| Loans                                                                                                                                   |       | 186,771,344           |        | 121,008,673 |   |
| Less,  allowance for loan losses                                                                                                        |       | 2,763,988             |        | 1,705,082 |   |
| Net loans                                                                                                                               |       | 184,007,356           |        | 119,303,591 |   |
| Property,  furniture and equipment - net                                                                                                |       | 14,313,090            |        | 7,981,611 |   |
| Goodwill                                                                                                                                |       | 24,256,020            |        | 35,834 |   |
| Core deposit  intangible                                                                                                                |       | 3,361,815             |        | 727,751 |   |
| Other assets                                                                                                                            |       | 14,416,034            |        | 1,543,008 |   |
| Total assets                                                                                                                            |       | $                     | 455,706,012 |   | $ | 215,028,689 |   |
|                                                                                                                                    |       |                  |        |   |   |
| LIABILITIES                                                                                                                             |       |                  |        |   |   |
| Deposits:                                                                                                                               |       |                  |        |   |   |
| Non-interest  bearing demand                                                                                                            |       | $                     | 49,519,816  |   | $ | 37,043,600 |   |
| NOW and  money market accounts                                                                                                          |       | 98,846,828            |        | 57,015,473 |   |
| Savings                                                                                                                                 |       | 35,370,267            |        | 11,222,761 |   |
| Time  deposits less than $100,000                                                                                                       |       | 100,629,304           |        | 45,125,843 |   |
| Time  deposits $100,000 and over                                                                                                        |       | 52,698,069            |        | 34,850,195 |   |
| Total deposits                                                                                                                          |       | 337,064,284           |        | 185,257,872 |   |
| Securities  sold under agreements to repurchase                                                                                         |       | 7,549,900             |        | 3,941,000 |   |
| Federal Home  Loan Bank Advances                                                                                                        |       | 42,452,122            |        | 5,000,000 |   |
| Long term  debt                                                                                                                         |       | 15,464,000            |        | — |   |
| Other  borrowed money                                                                                                                   |       | 184,593               |        | 160,076 |   |
| Other  liabilities                                                                                                                      |       | 2,528,424             |        | 1,160,927 |   |
| Total  liabilities                                                                                                                      |       | 405,243,323           |        | 195,519,875 |   |
|                                                                                                                                    |       |                  |        |   |   |
| SHAREHOLDERS’  EQUITY                                                                                                              |       |                  |        |   |   |
| Preferred  stock, par value $1.00 per share; 10,000,000 shares authorized; none issued  and outstanding                                 |       |                  |        |   |   |
| Common  stock, par value $1.00 per share; 10,000,000 shares authorized; issued and  outstanding 2,788,902 in 2004 and 1,597,224 in 2003 |       | 2,788,902             |        | 1,597,224 |   |
| Additional  paid in capital                                                                                                             |       | 41,832,090            |        | 12,862,715 |   |
| Retained  earnings                                                                                                                      |       | 6,712,849             |        | 4,909,742 |   |
| Accumulated  other comprehensive income (loss)                                                                                          |       | (871,152              | )           | 139,133 |   |
| Total  shareholders’ equity                                                                                                        |       | 50,462,689            |        | 19,508,814 |   |
| Total  liabilities and shareholders’ equity                                                                                        |       | $                     | 455,706,012 |   | $ | 215,028,689 |   |

 

**See Notesto Consolidated Financial Statements**

 

34

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**FIRST COMMUNITY CORPORATION**

**Consolidated Statements of Income**

 
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                 |       |                             |       |   |   |   |   |
| Interest  income:                                    |       |                             |       |   |   |   |   |
| Loans,  including fees                               |       | $                                | 9,063,092  |   | $ | 7,581,751 |   | $ | 7,025,363 |   |
| Investment  securities - available-for-sale          |       | 3,440,033                        |       | 2,069,345 |   | 2,427,970 |   |
| Investment  securities - held-to-maturity            |       | 206,681                          |       | 198,234 |   | 186,206 |   |
| Other short  term investments                        |       | 334,518                          |       | 179,030 |   | 207,577 |   |
| Total  interest income                               |       | 13,044,324                       |       | 10,028,360 |   | 9,847,116 |   |
|                                                 |       |                             |       |   |   |   |   |
| Interest  expense:                                   |       |                             |       |   |   |   |   |
| Deposits                                             |       | 2,729,459                        |       | 2,307,974 |   | 2,759,818 |   |
| Securities  sold under agreement to repurchase       |       | 40,934                           |       | 29,704 |   | 41,601 |   |
| Other  borrowed money                                |       | 677,830                          |       | 42,934 |   | 1,380 |   |
| Total  interest expense                              |       | 3,448,223                        |       | 2,380,612 |   | 2,802,799 |   |
| Net interest  income                                 |       | 9,596,101                        |       | 7,647,748 |   | 7,044,317 |   |
| Provision  for loan losses                           |       | 245,000                          |       | 167,000 |   | 677,000 |   |
| Net interest  income after provision for loan losses |       | 9,351,101                        |       | 7,480,748 |   | 6,367,317 |   |
|                                                 |       |                             |       |   |   |   |   |
| Non-interest  income:                                |       |                             |       |   |   |   |   |
| Deposit  service charges                             |       | 879,585                          |       | 700,359 |   | 586,918 |   |
| Mortgage  origination fees                           |       | 267,972                          |       | 343,472 |   | 300,363 |   |
| Gain on sale  of securities                          |       | 11,381                           |       | — |   | 60,616 |   |
| Other                                                |       | 614,783                          |       | 395,973 |   | 284,359 |   |
| Total  non-interest income                           |       | 1,773,721                        |       | 1,439,804 |   | 1,232,256 |   |
|                                                 |       |                             |       |   |   |   |   |
| Non-interest  expense:                               |       |                             |       |   |   |   |   |
| Salaries and  employee benefits                      |       | 4,263,383                        |       | 3,306,714 |   | 2,740,255 |   |
| Occupancy                                            |       | 489,261                          |       | 395,380 |   | 340,269 |   |
| Equipment                                            |       | 991,793                          |       | 803,482 |   | 629,119 |   |
| Marketing  and public relations                      |       | 325,395                          |       | 273,257 |   | 244,334 |   |
| Amortization  of intangibles                         |       | 279,685                          |       | 178,710 |   | 185,280 |   |
| Other                                                |       | 1,627,470                        |       | 1,200,638 |   | 1,238,255 |   |
| Total  non-interest expense                          |       | 7,976,987                        |       | 6,158,181 |   | 5,377,512 |   |
|                                                 |       |                             |       |   |   |   |   |
| Net income  before tax                               |       | 3,147,835                        |       | 2,762,371 |   | 2,222,061 |   |
| Income taxes                                         |       | 962,850                          |       | 964,890 |   | 757,701 |   |
| Net income                                           |       | $                                | 2,184,985  |   | $ | 1,797,481 |   | $ | 1,464,360 |   |
|                                                 |       |                             |       |   |   |   |   |
| Basic  earnings per common share                     |       | $                                | 1.15       |   | $ | 1.13 |   | $ | 0.92 |   |
| Diluted  earnings per common share                   |       | $                                | 1.09       |   | $ | 1.08 |   | $ | 0.90 |   |

 

**See Notes to Consolidated Financial Statements**

 

35

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**FIRST COMMUNITY CORPORATION**

**Consolidated Statement of Changes inShareholders’ Equity and ComprehensiveIncome**

 
| ** **                                                                   | ** ** | **Shares  Issued** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (loss)** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------|------------|
|                                                                         |       |               |       |              |       |                             |       |                   |       |                                                 |       |       |       |
| Balance December 31,  2001                                              |       | 1,270,609          |       | $                 | 1,270,609  |                             | $          | 13,088,744             |       | $                                                    | 2,144,611  |       | $          | 272,238 |   | $ | 16,776,202 |   |
| Comprehensive  income:                                                       |       |               |       |              |       |                             |       |                   |       |                                                 |       |       |       |
| Net income                                                                   |       |               |       |              |       |                             |       | 1,464,360              |       |                                                 |       | 1,464,360  |       |
| Accumulated  other comprehensive income, net of income tax of $217,860       |       |               |       |              |       |                             |       |                   |       | 392,898                                              |       | 392,898    |       |
| Total  comprehensive income                                                  |       |               |       |              |       |                             |       |                   |       |                                                 |       | 1,857,258  |       |
| 5-for-4  stock split                                                         |       | 317,361            |       | 317,361           |       | (317,361                         | )          | (4,181                 | )          |                                                 |       | (4,181     | )          |
| Cash  dividend ($0.12 per share)                                             |       |               |       |              |       |                             |       | (190,556               | )          |                                                 |       | (190,556   | )          |
| Balance December 31,  2002                                              |       | 1,587,970          |       | 1,587,970         |       | 12,771,383                       |       | 3,414,234              |       | 665,136                                              |       | 18,438,723 |       |
| Comprehensive  income:                                                       |       |               |       |              |       |                             |       |                   |       |                                                 |       |       |       |
| Net income                                                                   |       |               |       |              |       |                             |       | 1,797,481              |       |                                                 |       | 1,797,481  |       |
| Accumulated  other comprehensive income, net of income tax of $299,069       |       |               |       |              |       |                             |       |                   |       | (526,003                                             | )          | (526,003   | )          |
| Total  comprehensive income                                                  |       |               |       |              |       |                             |       |                   |       |                                                 |       | 1,271,478  |       |
| Cash  dividend ($0.19 per share)                                             |       |               |       |              |       |                             |       | (301,973               | )          |                                                 |       | (301,973   | )          |
| Exercise of  stock options                                                   |       | 6,923              |       | 6,923             |       | 45,909                           |       |                   |       |                                                 |       | 52,832     |       |
| Dividend  reinvestment plan                                                  |       | 2,331              |       | 2,331             |       | 45,423                           |       |                   |       |                                                 |       | 47,754     |       |
| Balance December 31,  2003                                              |       | 1,597,224          |       | 1,597,224         |       | 12,862,715                       |       | 4,909,742              |       | 139,133                                              |       | 19,508,814 |       |
| Comprehensive  income:                                                       |       |               |       |              |       |                             |       |                   |       |                                                 |       |       |       |
| Net income                                                                   |       |               |       |              |       |                             |       | 2,184,985              |       |                                                 |       | 2,184,985  |       |
| Accumulated  other comprehensive loss, net of income tax benefit of $544,002 |       |               |       |              |       |                             |       |                   |       | (1,010,285                                           | )          | (1,010,285 | )          |
| Total  comprehensive income                                                  |       |               |       |              |       |                             |       |                   |       |                                                 |       | 1,174,700  |       |
| Cash  dividend ($0.20 per share)                                             |       |               |       |              |       |                             |       | (381,878               | )          |                                                 |       | (381,878   | )          |
| Stock issued  in acquisition                                                 |       | 1,169,898          |       | 1,169,898         |       | 28,675,725                       |       |                   |       |                                                 |       | 29,845,623 |       |
| Exercise of  stock options                                                   |       | 15,409             |       | 15,409            |       | 205,365                          |       |                   |       |                                                 |       | 220,774    |       |
| Dividend  reinvestment plan                                                  |       | 6,371              |       | 6,371             |       | 88,285                           |       |                   |       |                                                 |       | 94,656     |       |
| Balance December 31,  2004                                              |       | 2,788,902          |       | $                 | 2,788,902  |                             | $          | 41,832,090             |       | $                                                    | 6,712,849  |       | $          | (871,152 | ) | $ | 50,462,689 |   |

 

**See Notes to Consolidated Financial Statements**

 

36

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**FIRST COMMUNITYCORPORATION**

**Consolidated Statements of Cash Flows**

 
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows  from operating activities:                                         |       |                             |       |   |   |   |   |
| Net income                                                                     |       | $                                | 2,184,985  |   | $ | 1,797,481 |   | $ | 1,464,360 |   |
| Adjustments  to reconcile net income to net cash used in operating activities: |       |                             |       |   |   |   |   |
| Depreciation                                                                   |       | 761,277                          |       | 631,356 |   | 502,666 |   |
| Premium  amortization (Discount accretion)                                     |       | (93,782                          | )          | 225,564 |   | 146,623 |   |
| Provision  for loan losses                                                     |       | 245,000                          |       | 167,000 |   | 677,000 |   |
| Amortization  of intangibles                                                   |       | 279,685                          |       | 178,710 |   | 185,280 |   |
| Gain on sale  of equipment                                                     |       | (21,707                          | )          | — |   | — |   |
| Gain on sale  of securities                                                    |       | (11,381                          | )          | — |   | (60,616 | ) |
| (Increase)  decrease in other assets                                           |       | (425,079                         | )          | 109,035 |   | (382,533 | ) |
| Tax benefit  from exercise of stock options                                    |       | 51,621                           |       | — |   | — |   |
| Increase  (decrease) in accounts payable                                       |       | 14,681                           |       | (68,241 | ) | 64,884 |   |
| Net cash  provided in operating activities                                     |       | 2,985,300                        |       | 3,040,905 |   | 2,597,664 |   |
|                                                                           |       |                             |       |   |   |   |   |
| Cash flows  form investing activities:                                         |       |                             |       |   |   |   |   |
| Proceeds  from sale of securities available-for-sale                           |       | 56,586,668                       |       | — |   | — |   |
| Purchase of  investment securities available-for-sale                          |       | (108,265,814                     | )          | (39,509,065 | ) | (55,130,066 | ) |
| Maturity/call  of investment securities available-for-sale                     |       | 36,424,205                       |       | 49,297,109 |   | 33,207,257 |   |
| Purchase of  investment securities held-to-maturity                            |       | (1,052,057                       | )          | (767,685 | ) | (951,762 | ) |
| Maturity/call  of investment securities held-to-maturity                       |       | —                           |       | 760,000 |   | — |   |
| Increase in  loans                                                             |       | (14,813,202                      | )          | (21,004,651 | ) | (12,624,773 | ) |
| Net cash  disbursed in business combination                                    |       | (11,131,142                      | )          | — |   | — |   |
| Proceeds  from sale of equipment                                               |       | 23,800                           |       | — |   | — |   |
| Purchase of  property and equipment                                            |       | (2,427,322                       | )          | (1,801,427 | ) | (817,231 | ) |
| Net cash  used in investing activities                                         |       | (44,654,864                      | )          | (13,025,719 | ) | (36,316,575 | ) |
|                                                                           |       |                             |       |   |   |   |   |
| Cash flows  from financing activities:                                         |       |                             |       |   |   |   |   |
| Increase in  deposit accounts                                                  |       | 16,996,662                       |       | 17,195,399 |   | 33,660,817 |   |
| Proceeds  from issuance of long term debt                                      |       | 15,000,000                       |       | — |   | — |   |
| Advances  from the Federal Home Loan Bank                                      |       | —                           |       | 5,000,000 |   | — |   |
| Repayment of  advances from the Federal Home Loan Bank                         |       | (1,000,000                       | )          | — |   | — |   |
| Increase  (decrease) in securities sold under agreements to repurchase         |       | 3,608,900                        |       | (3,365,064 | ) | 3,255,364 |   |
| Increase  (decrease) in other borrowings                                       |       | 24,517                           |       | (4,211 | ) | 1,938 |   |
| Proceeds  from exercise of stock options                                       |       | 169,153                          |       | 52,832 |   | — |   |
| Dividend  reinvestment plan                                                    |       | 94,656                           |       | 47,754 |   |   |   |
| Cash in lieu  of fractional shares                                             |       | —                           |       | — |   | (4,181 | ) |
| Cash  dividends paid                                                           |       | (381,878                         | )          | (301,973 | ) | (190,556 | ) |
| Net cash  provided from financing activities                                   |       | 34,512,010                       |       | 18,624,737 |   | 36,723,382 |   |
|                                                                           |       |                             |       |   |   |   |   |
| Net increase  in cash and cash equivalents                                     |       | (7,157,554                       | )          | 8,639,923 |   | 3,004,471 |   |
|                                                                           |       |                             |       |   |   |   |   |
| Cash and  cash equivalents at beginning of period                              |       | 26,483,199                       |       | 17,843,276 |   | 14,838,805 |   |
|                                                                           |       |                             |       |   |   |   |   |
| Cash and  cash equivalents at end of period                                    |       | $                                | 19,325,645 |   | $ | 26,483,199 |   | $ | 17,843,276 |   |
|                                                                           |       |                             |       |   |   |   |   |
| Supplemental  disclosure:                                                      |       |                             |       |   |   |   |   |
| Cash paid  during the period for:                                              |       |                             |       |   |   |   |   |
| Interest                                                                       |       | $                                | 3,139,817  |   | $ | 2,431,318 |   | $ | 2,754,208 |   |
| Taxes                                                                          |       | $                                | 907,268    |   | $ | 1,000,000 |   | $ | 818,000 |   |
| Non-cash investing  and financing activities:                                  |       |                             |       |   |   |   |   |
| Unrealized  (loss) gain on securities available-for-sale                       |       | $                                | (1,554,287 | ) | $ | (825,072 | ) | $ | 629,930 |   |
| Transfer of  loans to foreclosed property                                      |       | $                                | 119,916    |   | $ | 25,701 |   | $ | — |   |
| Common stock  issued in acquisition                                            |       | $                                | 29,845,623 |   | $ | — |   | $ | — |   |
|                                                                                |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

**See Notes to Consolidated FinancialStatements**

 

37

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**FIRST COMMUNITY CORPORATION**

**Notes to Consolidated Financial Statements**

 

Note1 - ORGANIZATION AND BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of FirstCommunity Corporation (the company) and its wholly owned subsidiary FirstCommunity Bank, N.A (the bank). All material intercompany transactions areeliminated in consolidation. The Company was organized on November 2,1994, as a South Carolina corporation, and was formed to become a bank holdingcompany. The bank opened for business on August 17, 1995.

 

Note2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

The financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America. These principlesrequire management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

Material estimates that are particularly susceptible to significantchange relate to the determination of the reserve for loan losses. Theestimation process includes management’s judgment as to future losses onexisting loans based on an internal review of the loan portfolio, including ananalysis of the borrowers current financial position, the consideration ofcurrent and anticipated economic conditions and the effect on specificborrowers. In determining the collectibility of loans management also considersthe fair value of underlying collateral. Various regulatory agencies, as anintegral part of their examination process, review the Company’s allowance forloan losses. Such agencies may require the company to recognize additions tothe allowance based on their judgments about information available to them atthe time of their examination. Because of these factors it is possible that theallowance for loan losses could change materially.

 

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, due from banks,federal funds sold and securities purchased under agreements to resell.Generally federal funds are sold for a one-day period and securities purchasedunder agreements to resell mature in less than 90 days.

 

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Investment Securities

Investment securities are classified as either held-to-maturity oravailable-for-sale. In determining such classification, securities that thecompany has the positive intent and ability to hold to maturity are classifiedas held-to maturity and are carried at amortized cost. All other securities areclassified as available-for-sale and carried at estimated fair values withunrealized gains and losses included in shareholders’ equity on an after taxbasis.

 

Gains and losses on the sale of available-for-sale securities aredetermined using the specific identification method. Declines in the fair valueof individual held-to-maturity and available-for-sale securities below theircost that are judged to be other than temporary are written down to fair valueand charged to income in the Consolidated Statement of Income.

 

Premiums and discounts are recognized in interest income using theinterest method over the period to maturity.

 

Loans and Allowance for Loan Losses

Loans receivable that management has the intent and ability to hold forthe foreseeable future or until maturity or pay-off are reported at theiroutstanding principal balance adjusted for any charge-offs, the allowance forloan losses, and any deferred fees or costs on originated loans. Interest isrecognized over the term of the loan based on the loan balance outstanding.Fees charged for originating loans, if any, are deferred and offset by thedeferral of certain direct expenses associated with loans originated. The netdeferred fees are recognized as yield adjustments by applying the interestmethod.

 

The allowance for loan losses is maintained at a level believed to beadequate by management to absorb potential losses in the loan portfolio.Management’s determination of the adequacy of the allowance is based on anevaluation of the portfolio, past loss experience, economic conditions andvolume, growth and composition of the portfolio.

 

The company considers a loan to be impaired when, based upon currentinformation and events, it is believed that the company will be unable tocollect all amounts due according to the contractual terms of the loanagreement. Loans that are considered impaired are accounted for at fair value.The accrual of interest on impaired loans is discontinued when, in management’sopinion , the borrower may be unable to meet payments as they become due,generally when a loan becomes 90 days past due. When interest accrual isdiscontinued, all unpaid accrued interest is reversed. Interest income issubsequently recognized only to the extent cash payments are received first toprincipal and then to interest income.

 

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.Depreciation is computed using the straight-line method over the asset’sestimated useful life. Estimated lives range up to 39 years for buildings andup to 10 years for furniture, fixtures and equipment.

 

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Goodwill and Other Intangible Assets

Goodwill represents the cost in excess of fair value of net assetsacquired (including identifiable intangibles) in purchase transactions. Otherintangible assets represent premiums paid for acquisitions of core deposits(core deposit intangibles). Core deposit intangibles are being amortized on astraight-line basis over seven years. Goodwill is not amortized but is testedannually for impairment.

 

Comprehensive Income

The Company reports comprehensive income in accordance with SFAS 130, “ReportingComprehensive Income.” SFAS 130 requires that all items that are required to bereported under accounting standards as comprehensive income be reported in afinancial statement that is displayed with the same prominence as otherfinancial statements. The disclosures requirements have been included in theCompany’s consolidated statements of shareholders’ equity and comprehensiveincome.

 

Marketing and Public Relations Expense

The company expenses marketing and public relations expense as incurred

 

Income Taxes

A deferred income tax liability or asset is recognized for the estimatedfuture effects attributable to differences in the tax bases of assets orliabilities and their reported amounts in the financial statements as well asoperating loss and tax credit carryforwards. The deferred tax asset orliability is measured using the enacted tax rate expected to apply to taxableincome in the period in which the deferred tax asset or liability is expectedto be realized.

 

Stock Based Compensation Cost

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Accordingly, compensation cost forstock options is measured as the excess, if any, of the market price of theCompany’s stock at the date of the grant over the amount an employee must payto acquire the stock. Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (SFAS 123) was issued in October 1995, andencourages but does not require, adoption of a fair value method of accountingfor employee stock based compensation plans. The company has adopted thedisclosure-only provisions of SFAS 123 and has disclosed in the footnotespro-forma net income and earnings per share information as if the fair valuemethod had been applied.

 

Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed bydividing income available to common shareholders by the weighted-average numberof common shares outstanding for the period. Diluted EPS is computed bydividing net income by the weighted number of average shares of common stockand common stock equivalents. Common stock equivalents consist of stock optionsand are computed using the treasury stock method.

 

Segment Information

Statement of Financial Accounting Standards (SFAS) No. 131 “Disclosuresabout Segments of an Enterprise and Related Information” requires selectedsegment information of operating segments based on a management approach. Thecompany operates as one business segment.

 

40

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Note 3 - Business Combination

 

OnOctober 1, 2004, First Community completed its acquisition of DutchForkBancshares the holding company for Newberry Federal Savings Bank located in Newberry,South Carolina.  The merger enabled FirstCommunity to increase its market share in the Midlands of South Carolina. Thetotal purchase price was $49,273,493, including $18,342,357 in cash, 1,169,898shares of our common stock valued at $27,258,623, stock options valued at$2,587,000 and direct acqusition cost of $1,085,513.  The value of the common stock issued wasdetermined based on the average closing price over the six day period beginningtwo days before and ending three days after the terms of the acquisition wereagreed to and announced.  The intangibleassets acquired in conjunction with the purchase are core deposit intangibleand goodwill.  The core depositintangible is being written off over a period of seven years using thestraight-line method.  The transactionwas a tax-free reorganization for federal income tax purposes and intangibleassets are not deductible for tax purposes.

 

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at October 1, 2004, the date of acquisition includingsubsequent adjustments to the allocation of the purchase price.

 
| Cash and  cash equivalents               | ** ** | $           | 8,296,728  | ** ** |
|------------------------------------------|------------|-------------|------------|------------|
| Securities                               |       | 122,438,367 |       |
| Loans, net of allowance                  |       | 50,194,807  |       |
| Premises and equipment                   |       | 4,667,527   |       |
| Other assets                             |       | 11,439,945  |       |
| Core deposit intangible                  |       | 2,916,325   |       |
| Goodwill                                 |       | 24,220,185  |       |
| Total assets acquired                    |       | 224,173,884 |       |
|                                     |       |        |       |
| Deposits                                 |       | 134,937,575 |       |
| Advances from the Federal Home Loan Bank |       | 38,610,000  |       |
| Other liabilities                        |       | 1,352,816   |       |
| Total liabilities assumed                |       | 174,900,391 |       |
| Net assets acquired                      |       | $           | 49,273,493 |       |
|                                          |            |             |            |            |  |

 

The following unaudited presentation reflects selected information fromthe “Consolidated Income Statements” on a Pro Forma basis as if the purchasetransaction had been completed as of the beginning of the years presented:

 
| ** **                                                          | ** ** | **For Fiscal Year Ending** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| Total  revenues                                                     | ** ** | $                          | 22,754,043 | ** ** | $ | 25,742,579 | ** ** |
| Income before cummulative effect of change  in accounting principle |       | $                          | 2,367,732  |   | $ | 5,823,778 |   |
| Net Income                                                          |       | $                          | 2,367,732  |   | $ | 5,823,778 |   |
| Basic EPS                                                           |       | $                          | 0.85       |   | $ | 2.11 |   |
| Diluted EPS                                                         |       | $                          | 0.80       |   | $ | 1.99 |   |

 

During the year ending December 31, 2003 and for the nine months endedSeptember 30, 2004 DutchFork Bancshares had gains on the sale of securities inthe amount of $2.1 million and $750,000, respectively as a result ofrestructuring their available-for-sale investment portfolio.  Future restructurings may not result in thepositive gains experienced in these prior periods.Prior to the consummation ofthe merger DutchFork Bancshares had significant direct merger related expensesas well as expenses to terminate various benefit plans.  These expenses of approximately $2,870,000have been excluded in the pro-forma results for the fiscal year ending in 2004.

 

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Note4 - INVESTMENT SECURITIES

 

The amortized cost andestimated fair values of investment securities are summarized below:

 

HELD-TO-MATURITY:

 
| ** **                 | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** |
|----------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------|------------|
| December 31, 2004:         |       |                |       |                        |       |                        |       |           |       |
| State and local government |       | $                   | 6,005,745  |                        | $          | 144,919                     |       | $              | 12,966     |   | $ | 6,137,698 |   |
| Other                      |       | 10,000              |       | —                      |       | —                      |       | 10,000         |       |
|                       |       | $                   | 6,015,745  |                        | $          | 144,919                     |       | $              | 12,966     |   | 6,147,698 |   |
| December 31, 2003:         |       |                |       |                        |       |                        |       |           |       |
| State and local government |       | $                   | 4,984,896  |                        | $          | 193,254                     |       | $              | 18,868     |   | 5,159,282 |   |
| Other                      |       | 10,000              |       | —                      |       | —                      |       | 10,000         |       |
|                       |       | $                   | 4,994,896  |                        | $          | 193,254                     |       | $              | 18,868     |   | $ | 5,169,282 |   |
|                            |            |                     |            |                             |            |                             |            |                |            |  |  |  |  |  |  |  |  |  |

 

AVAILABLE-FOR-SALE:

 
| ** **                      | ** ** | **Amortized  Cost** | ** **  | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** |
|---------------------------------|------------|---------------------|-------------|-----------------------------|------------|-----------------------------|------------|----------------|------------|
|                            |       | ** **          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **     |       |
| December 31, 2004:              |       |                |        |                        |       |                        |       |           |       |
| US Treasury securities          |       | $                   | 999,546     |                        | $          | —                      |       | $              | 1,734      |   | $ | 997,812 |   |
| US Government agency securities |       | 64,106,098          |        | 47,693                      |       | 398,390                     |       | 63,755,401     |       |
| Mortgage-backed securities      |       | 71,096,802          |        | 155,312                     |       | 196,538                     |       | 71,055,576     |       |
| Equity and other securities     |       | 55,148,097          |        | 189,631                     |       | 1,136,210                   |       | 54,201,518     |       |
|                            |       | $                   | 191,350,543 |                        | $          | 392,636                     |       | $              | 1,732,872  |   | 190,010,307 |   |
|                            |       |                |        |                        |       |                        |       |           |       |
| December 31, 2003:              |       |                |        |                        |       |                        |       |           |       |
| US Treasury securities          |       | $                   | 3,004,510   |                        | $          | 22,389                      |       | $              | —     |   | 3,026,899 |   |
| US Government agency securities |       | 35,519,237          |        | 197,131                     |       | 120,055                     |       | 35,596,313     |       |
| Mortgage-backed securities      |       | 14,280,293          |        | 140,250                     |       | 25,663                      |       | 14,394,880     |       |
| Other                           |       | 940,707             |        | —                      |       | —                      |       | 940,707        |       |
|                            |       | $                   | 53,744,747  |                        | $          | 359,770                     |       | $              | 145,718    |   | $ | 53,958,799 |   |

 

For the year ended December 31, 2004, proceeds from the sale ofsecurities available-for-sale amounted to $56,586,668. Gross realized gainamounted to $16,119 and gross realized losses amounted to $4,738 in 2004.  For the year ended December 31, 2002,proceeds from the sales of securities available-for-sale amounted to $2,590,782.Gross realized gains amounted to $60,616 in 2002. There were no gross realizedlosses. The tax provision applicable to the realized net gains wasapproximately $3,400 and $20,700 for 2004 and 2002, respectively.  There were no sales of securities in 2003.

 

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Theamortized cost and fair value of investment securities at December 31, 2004, bycontractual maturity, follow.Expected maturities differ from contractual maturities because borrowersmay have the right to call or prepay the obligations with or without prepayment penalties.

 
| ** **                             | ** ** | **Held-to-maturity** | ** ** | **Available-for-sale** | ** ** |
|----------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                             | ** ** | **Amortized  Cost**  | ** ** | **Fair  Value**        | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                             | ** ** | ** **           | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Due in one year or less                |       | $                    | 326,683    |                   | $          | 328,175 |   | $ | 43,736,357 |   | $ | 43,631,746 |   |
| Due after one year through five years  |       | 3,496,635            |       | 3,573,859              |       | 71,111,401 |   | $ | 70,927,416 |   |
| Due after five years through ten years |       | 1,784,145            |       | 1,834,098              |       | 22,732,876 |   | $ | 22,655,917 |   |
| Due after ten years                    |       | 408,282              |       | 411,566                |       | 53,769,909 |   | $ | 52,795,228 |   |
|                                   |       | $                    | 6,015,745  |                   | $          | 6,147,698 |   | $ | 191,350,543 |   | $ | 190,010,307 |   |
|                                        |            |                      |            |                        |            |  |  |  |  |  |  |  |  |  |

 

Securities with an amortizedcost of $39,534,000 and fair value of $39,480,000 at December 31, 2004, werepledged to secure FHLB Advances, public deposits, demand notes due the U.S. Treasuryand securities sold under agreements to repurchase.

 

The following table shows gross unrealized losses and fair values,aggregated by investment category and length of time that individual securitieshave been in a continuous loss position at December 31, 2004.

 
| ** **                      | ** ** | **Less than 12 months** | ** **  | **12 months or more** | ** ** | **Total**      | ** ** |
|---------------------------------|------------|-------------------------|-------------|-----------------------|------------|----------------|------------|
| ** **                      | ** ** | **Fair Value**          | ** **  | **Unrealized  Loss**  | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** |
| Available-for-sale securities:  |       |                    |        |                  |       |           |       |   |   |   |   |   |   |
| US Treasury securities          |       | $                       | 997,812     |                  | $          | 1,734          |       | $ | — |   | $ | — |   | $ | 997,812 |   | $ | 1,734 |   |
| US Government agency securities |       | 52,274,164              |        | 358,525               |       | 959,238        |       | 39,865 |   | 53,233,402 |   | 398,390 |   |
| Mortgage-backed securities      |       | 32,467,779              |        | 183,844               |       | 1,308,068      |       | 12,694 |   | 33,775,847 |   | 196,538 |   |
| Equity and other securities     |       | 39,778,987              |        | 1,136,210             |       | —         |       | — |   | 39,778,987 |   | 1,136,210 |   |
|                            |       | 125,518,742             |        | 1,680,313             |       | 2,267,306      |       | 52,559 |   | 127,786,048 |   | 1,732,872 |   |
| Held-to-maturity securities:    |       |                    |        |                  |       |           |       |   |   |   |   |   |   |
| State and local government      |       | 893,104                 |        | 12,966                |       | —         |       | — |   | 893,104 |   | 12,966 |   |
| Total                           |       | $                       | 126,411,846 |                  | $          | 1,693,279      |       | $ | 2,267,306 |   | $ | 52,559 |   | $ | 128,679,152 |   | $ | 1,745,838 |   |
|                                 |            |                         |             |                       |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On December 31, 2004, the company held certain investments havingcontinuous unrealized loss positions for more than 12 months totaling $2,267,306.These include one government agency bond and three mortgage-backedsecurities.  The company has notrecognized any other than temporary impairment in connection with theseinvestments. The decline in market value is related to fluctuations in interestrates and it is expected that the securities will be settled at a price no lessthan their amortized cost.

 

Note 5 - LOANS

 

Loans summarized by categoryare as follows:

 
| ** **                             | ** ** | **December 31,** | ** **  |
|----------------------------------------|------------|------------------|-------------|
| ** **                             | ** ** | **2004**         | ** **  | **2003** | ** ** |
| Commercial, financial and agricultural |       | $                | 19,001,033  |   | $ | 11,517,891 |   |
| Real estate - construction             |       | 8,065,516        |        | 7,781,620 |   |
| Real estate - mortgage                 |       |             |        |   |   |
| Commercial                             |       | 96,811,130       |        | 72,668,233 |   |
| Residential                            |       | 35,438,373       |        | 11,803,875 |   |
| Consumer                               |       | 27,455,292       |        | 17,237,054 |   |
|                                   |       | $                | 186,771,344 |   | $ | 121,008,673 |   |

 

Activity in the allowance forloan losses was as follows:

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance at the beginning of year   |       | $                | 1,705,082  |   | $ | 1,525,308 |   | $ | 1,000,412 |   |
| Allowance purchased in acquisition |       | $                | 994,878    |   | — |   | — |   |
| Provision for loan losses          |       | 245,000          |       | 167,000 |   | 677,000 |   |
| Charged off loans                  |       | (293,479         | )          | (235,183 | ) | (171,735 | ) |
| Recoveries                         |       | 112,507          |       | 247,957 |   | 19,631 |   |
| Balance at end of year             |       | $                | 2,763,988  |   | $ | 1,705,082 |   | $ | 1,525,308 |   |

 

At December 31, 2004 , theBank had no loans in a non accrual status. Loans classified impaired at December 31, 2004 and 2003 totaled $0.00and $80,292.  These loans were recordedat or below fair value.  The averagerecorded investment in loans classifed as impaired for the years ended December31, 2004 and 2003 amounted to $149,084 and $170,178, respectively.

 

Loansoutstanding to Bank directors, executive officers and their related businessinterests amounted to $2,318,853 and $2,419,324 at December31, 2004 and 2003, respectively. Repayments on these loans during the year ended December 31, 2004 were$606,538 and loans made amounted to $220,000. Loans acquired in the DutchFork acquisition amounted to  $286,067.  Related party loans are made on substantiallythe same terms, including interest rates and collateral, as those prevailing atthe time for comparable transactions with unrelated persons and generally donot involve more than the normal risk of collectibility.

 

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Note6 - PROPERTY AND EQUIPMENT

 

Propertyand equipment consisted of the following: 

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|------------------|------------|
| ** **               | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                     |       |             |       |   |   |
| Land                     |       | $                | 4,906,222  |   | $ | 2,806,306 |   |
| Premises                 |       | 7,174,008        |       | 3,859,107 |   |
| Equipment                |       | 4,245,711        |       | 3,034,271 |   |
| Construction in progress |       | 1,050,855        |       | 801,694 |   |
|                     |       | 17,376,796       |       | 10,501,378 |   |
| Accumulated depreciation |       | 3,063,706        |       | 2,519,767 |   |
|                     |       | $                | 14,313,090 |   | $ | 7,981,611 |   |

 

Provision for depreciationincluded in operating expenses for the years ended December 31, 2004, 2003 and2002 amounted to $761,277, $631,356 and $502,665, respectively.

 

Note 7 - INTANGIBLE AND OTHER ASSETS

 

Intangible assets (excludinggoodwill) consisted of the following:

 
| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|------------------|------------|
| ** **                                    | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Core deposit premiums, gross carrying  amount |       | $                | 4,148,273  |   | $ | 1,231,948 |   |
| Accumulated amortization                      |       | (786,458         | )          | (504,197 | ) |
| Net                                           |       | $                | 3,361,815  |   | $ | 727,751 |   |

 

With the acquisition ofDutchFork Bancshares the company acquired certain bank-owned life insurancepolicies that provide benefits to various employees and officers.  The carrying value of these these policies atDecember 31, 2004 were $5,560,208 and are included in other assets.  The company did not have any bank-owned lifeinsurance policies at December 31, 2003.

 

Note 8 - DEPOSITS

 

At December 31, 2004, thescheduled maturities of Certificates of Deposits are as follows:

 
| ** ** | ** ** | 2005   | ** ** | $          | 108,512,823 | ** ** |
|------------|------------|--------|------------|------------|-------------|------------|
|       |       | 2006   |       | 12,823,386 |        |
|       |       | 2007   |       | 12,177,201 |        |
|       |       | 2008   |       | 4,020,245  |        |
|       |       | 2009   |       | 15,792,718 |        |
|       |       |   |       | $          | 153,327,373 |       |

 

Note 9 - SECURITIES SOLD UNDER AGREEMENTS TOREPURCHASE AND OTHER BORROWED MONEY 

 

Securitiessold under agreements to repurchase generally mature within one to four daysfrom the transaction date.  The weightedaverage interest rate at December 31, 2004 and 2003, was 0.71% and 0.51%,respectively. The maximum month-end balance during 2004 and 2003 was $7,564,700and $8,155,100 respectively.

 

Otherborrowed money at December 31, 2004 and 2003 consisted of $184,593 and$160,076, repectively which was due under the treasury tax and loan noteprogram. 

 

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Note10 - ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT

 

Advances from the Federal Home Loan Bank of Atlanta at December 31, 2004consisted of the following:

 
| ** **   | ** ** | ** ** | **2004**                   | ** ** | **2003**   | ** ** |
|--------------|------------|------------|----------------------------|------------|------------|------------|
| **Maturing** | ** ** | ** ** | **Weighted  Average Rate** | ** ** | **Amount** | ** ** | **Weighted  Average Rate** | ** ** | **Amount** | ** ** |
| 2004         |       |       |                       |       | $          | —     |   | 1.60 | % | $ | 1,000,000 |   |
| 2005         |       |       | 2.08                       | %          | 2,500,000  |       | 2.08 | % | 2,500,000 |   |
| 2006         |       |       | 2.83                       | %          | 1,500,000  |       | 2.83 | % | 1,500,000 |   |
| 2008         |       |       | 3.42                       | %          | 10,709,697 |       |   |   | — |   |
| 2010         |       |       | 3.64                       | %          | 27,742,425 |       |   |   | — |   |
|         |       |       | 3.46                       | %          | $          | 42,452,122 |   | 2.24 | % | $ | 5,000,000 |   |

 

As collateral for its advances, the Company has pledged in the form ofblanket liens, eligible single family loans,home equity lines of credit, secondmortgage loans commercial real estate loans and multi family loans in theamount of $69,531,000 at December 31, 2004. In addition, securities with a fair value of $18,393,735  have been pledged as collateral for advancesas of December 31, 2004.  At December 31,2003 securities with a fair value of $5,314,730 were pledged as collateral foradvances.  In addition, the company’sinvestment in Federal Home Loan Bank stock is pledged for advances.  Advances are subject to prepaymentpenalties.  The average advances during2004 and 2003 were $14,314,420 and $1,904,000, respectively.  The average interest rate for 2004 and 2003was 3.23% and 2.24%, respectively. The maximum outstanding amount at any monthend was $42,556,961 and $5,000,000 for 2004 and 2003.

 

Purchase premiums included in advances acquired in the acquisition ofDutchFork reflected in the advances maturing in 2008 and 2010 amount to$709,697 and $2,742,425, respectively at December 31, 2004.  The coupon rate on these advances are 5.67%and 5.76%, respectively. 

 

OnSeptember 16, 2004, FCC Capital Trust I (Trust I), a wholly owned subsidiary ofthe Company, issued and sold floating rate securities having an aggregate liquidationamount of $15,000,000. The Trust I securities accrue and pay distributionsquarterly at a rate per annum equal to LIBOR plus 257 basis points.  The distributions are cummulative and payablein arrears.  The company has the right,subject to events of default, to defer payments of interest on the Trust Isecurities for a period not to exceed 20 consecutive quarters, provided noextension can extend beyond the maturity date of September 16, 2034.  The Trust I securities are mandatorilyredeemable upon maturity of September 16, 2034. If the Trust I securities are redeemed on or after September 16, 2009,the redemption price will be 100% of the principal amount plus accrued andunpaid interest. The Trust I securities may be redeemed in whole but not inpart, at any time prior to September 16, 2009 following the occurrence of a taxevent, a capital treatment event or an investment company event.  Currently these securities qualify underrisk-based capital guidelines as Tier 1 capital, subject to certain limitations.  The company has no current intention toexercise its right to defer payments of interest on the Trust I securities. 

 

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Note11 - INCOME TAXES

 

Income tax expense for theyears ended December 31, 2004, 2003 and 2002 consists of the following:

 
| ** **                    | ** ** | **Year ended December 31** | ** ** |
|-------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current                       |       |                       |       |   |   |   |   |
| Federal                       |       | $                          | 651,304    |   | $ | 869,508 |   | $ | 917,475 |   |
| State                         |       | 104,072                    |       | 97,727 |   | 91,064 |   |
|                          |       | 755,376                    |       | 967,235 |   | 1,008,539 |   |
| Deferred                      |       |                       |       |   |   |   |   |
| Federal                       |       | 197,474                    |       | 6,749 |   | (229,816 | ) |
| State                         |       | 10,000                     |       | (9,094 | ) | (21,022 | ) |
|                          |       | 207,474                    |       | (2,345 | ) | (250,838 | ) |
| Change in valuation allowance |       | —                     |       | — |   | — |   |
| Income tax expense            |       | $                          | 962,850    |   | $ | 964,890 |   | $ | 757,701 |   |

 

A reconciliation fromexpected federal tax expense to effective income tax expense for the periodsindicated are as follows: 

 
| ** **                              | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Expected federal income tax expense     |       | $                          | 1,101,742  |   | $ | 939,206 |   | $ | 755,500 |   |
|                                    |       |                       |       |   |   |   |   |
| State income tax net of federal benefit |       | 37,584                     |       | 64,600 |   | 60,100 |   |
| Tax exempt interest                     |       | (64,126                    | )          | (61,300 | ) | (58,700 | ) |
| Nontaxable dividends                    |       | (101,821                   | )          |   |   |   |   |
| Other                                   |       | (10,529                    | )          | 22,384 |   | 801 |   |
|                                    |       | $                          | 962,850    |   | $ | 964,890 |   | $ | 757,701 |   |

 

46

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The following is a summary ofthe tax effects of temporary differences that give rise to significant portionsof the deferred tax assets and deferred tax liabilities: 

 
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|
| ** **                                            | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Assets:                                               |       |             |       |   |   |
| Provision for bad debts                               |       | $                | 994,777    |   | $ | 613,671 |   |
| Excess tax basis of deductible intangible  assets     |       | 131,376          |       | 98,005 |   |
| Premium on purchased FHLB Advances                    |       | 1,242,441        |       | — |   |
| Net operating loss carryforward                       |       | 5,161,156        |       | — |   |
| Excess tax basis of assets acquired                   |       | 488,534          |       | — |   |
| Unrealized loss on available-for  sale-securities     |       | 482,359          |       | — |   |
| Compensation expense deferred for tax  purposes       |       | 453,385          |       | — |   |
| Other                                                 |       | 859,779          |       | — |   |
| Deferred tax asset                                    |       | 9,813,807        |       | 711,676 |   |
| Liabilities:                                          |       |             |       |   |   |
| Tax depreciation in excess of book  depreciation      |       | 266,919          |       | 157,672 |   |
| Excess tax basis of non-deductible  intangible assets |       | 1,012,121        |       | — |   |
| Excess financial reporting basis of assets  acquired  |       | 1,022,207        |       | — |   |
| Income tax bad debt reserve recapture  adjustment     |       | 1,653,746        |       |   |   |
| Unrealized gain on securities  available-for-sale     |       | —           |       | 77,038 |   |
| Other                                                 |       | 66,943           |       | — |   |
| Total deferred tax liabilities                        |       | 4,021,936        |       | 234,710 |   |
| Net deferred tax asset recognized                     |       | $                | 5,791,871  |   | $ | 476,966 |   |
|                                                       |            |                  |            |  |  |  |  |  |  |

 

AtDecember 31, 2004, the company has net operating loss carryforwards for stateand federal income tax purposes of $14,340,000 available to offset futuretaxable income through 2023. There was no valuation allowance for deferred taxassets at either December 31, 2004 or 2003. No valuation allowance has been established as it is management’s beliefthat realization of the deferred tax asset is more likely than not.  The ultimate realizatiion of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which the temporary differences become deductible.  Management considers the scheduled reversalof deferred income tax liabilities, projected future taxable income and taxplanning strategies in making this assessment. The amount of these deferred tax assets considered to be realizable couldbe reduced in the near term if estimates of future taxable income during thecarryforward period are reduced.  The netdeferred asset is included in other assets on the consolidated balance sheets.

 

Aportion of the change in the net deferred tax asset relates to unrealized gainsand losses on securities available-for-sale. The related tax benefit of $559,397 has been recorded directly toshareholders’ equity.  The balance of thechange in the net deferred tax asset results from acquired net deferred taxassets of $4,962,982 less current period deferred taxes of $207,474. 

 

47

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Note12 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Statement of Financial Accounting Standards No. 107, “Disclosure aboutFair Value of Financial Instruments” (SFAS 107), requires the Company todisclose estimated fair values for its financial instruments.  Fair value estimates, methods, andassumptions are set forth below.

 

Cash and short term investments - The carrying amount of these financialinstruments (cash and due from banks, federal funds sold and securitiespurchased under agreements to resell) approximate fair value.  All mature within 90 days and do not presentunanticipated credit concerns.

 

Investment Securities - Fair values are based on quoted market prices,where available.  If quoted market pricesare not available, fair values are based on quoted market prices of comparable instruments.

 

Loans - The fair value of loans are estimated by discounting the futurecash flows using the current rates at which similar loans ‘would be made toborrowers with similar credit ratings and and for the same remainingmaturities.  As discount rates are basedon current loan rates as well as management estimates, the fair valuespresented may not be indicative of the value negotiated in an actual sale.

 

Accrued Interest Receivable - The fair value approximates the carryingvalue.

 

Deposits - The fair value of demand deposits, savings accounts, andmoney market accounts is the amount payable on demand at the reportingdate.  The fair value of fixed-maturitycertificates of deposits is estimated by discounting the future cash flowsusing rates currently offered for deposits of similar remaining maturities.

 

Federal Home Loan Bank Advances - Fair value is estimated based on discountedcash flows using current market rates for borrowings with similar terms.

 

Short Term Borrowings - The carrying value of short term borrowings(securities sold under agrreements to repurchase and demand notes to the U.S.Treasury) approximates fair value.

 

Long-term Debt - The fair values of long-term debt is estimated by usingdiscounted cash flow analyses based on incremental borrowing rates for similartypes of instruments.

 

AccruedInterest Payable - The fair value approximates the carrying value.

 

Commitmentsto Extend Credit - The fair value of these commitments is immaterial because theirunderlying interest rates approximate market.

 

48

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Thecarrying amount and estimated fair value of the Company’s financial instrumentsare as follows:

 
| ** **                      | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Carrying  Amount**  | ** ** | **Fair  Value**       | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Financial Assets:               |       |                  |       |                  |       |   |   |   |   |
| Cash and short term investments |       | $                     | 19,325,645 |                  | $          | 19,325,645 |   | $ | 26,483,199 |   | $ | 26,483,199 |   |
| Held-to-maturity securities     |       | 6,015,745             |       | 6,147,698             |       | 4,994,896 |   | 5,169,282 |   |
| Available-for-sale securities   |       | 190,010,307           |       | 190,010,307           |       | 53,958,799 |   | 53,958,799 |   |
| Loans receivable                |       | 186,771,344           |       | 183,609,011           |       | 121,008,673 |   | 122,553,917 |   |
| Allowance for loan losses       |       | 2,763,988             |       | —                |       | 1,705,082 |   | — |   |
| Net loans                       |       | 184,007,356           |       |                  |       | 119,303,591 |   |   |   |
| Accrued interest                |       | 1,660,972             |       | 1,660,972             |       | 876,895 |   | 876,895 |   |
|                            |       |                  |       |                  |       |   |   |   |   |
| Financial liabilities:          |       |                  |       |                  |       |   |   |   |   |
| Non-interest bearing demand     |       | $                     | 49,519,816 |                  | $          | 49,519,816 |   | $ | 37,043,600 |   | $ | 37,043,600 |   |
| NOW and money market accounts   |       | 98,846,828            |       | 98,846,828            |       | 57,015,473 |   | 57,015,473 |   |
| Savings                         |       | 35,370,267            |       | 35,370,267            |       | 11,222,761 |   | 11,222,761 |   |
| Certificates of deposit         |       | 153,327,373           |       | 154,390,247           |       | 79,976,038 |   | 81,399,845 |   |
| Total deposits                  |       | 337,064,284           |       | 338,127,158           |       | 185,257,872 |   | 186,681,679 |   |
| Federal Home Loan Bank Advances |       | 42,452,122            |       | 41,422,224            |       | 5,000,000 |   | 5,020,371 |   |
| Short term borrowings           |       | 7,734,493             |       | 7,734,493             |       | 4,101,076 |   | 4,101,076 |   |
| Long-term debt                  |       | 15,464,000            |       | 15,464,000            |       | — |   | — |   |
| Accrued interest payable        |       | 1,015,435             |       | 1,015,435             |       | 581,779 |   | 581,779 |   |

 

Note 13 - COMMITMENTS, CONCENTRATIONS OFCREDIT RISK AND CONTINGENCIES

 

The Bank is party to financial instruments with off-balance-sheet riskin the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsinclude commitments to extend credit. These instruments involve, to varying degrees, elements of credit riskin excess of the amount recognized in the consolidated balance sheets.

 

The Bank’s exposure to credit loss in the event of nonperformance by theother party to the financial instrument for commitments to extend credit isrepresented by the contractual amount of these instruments. The Bank uses thesame credit policies in making commitments as for on-balance sheetinstruments.  At December 31, 2004 and2003, the Bank had commitments to extend credit including unused lines ofcredit of $32,499,000 and $24,266,000, respectively.

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require a payment of a fee.  Since commitments may expire without beingdrawn upon, the total commitments do not necessarily represent future cashrequirements.  The Bank evaluates eachcustomer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemednecessary by the Bank upon extension of credit, is based on management’s creditevaluation of the party.  Collateral heldvaries but may include inventory, property and equipment, residential realestate and income producing commercial properties.

 

49

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The primary market area served by the Bank is Lexington, Richland andNewberry Counties within the Midlands of South Carolina.  Management closely monitors its creditconcentrations and attempts to diversify the portfolio within its primarymarket area. At December 31, 2004, management does not consider there to be anysignificant credit concentration within the portfolio.  Although, the Bank’s loan portfolio as wellas existing commitments reflect the diversity of its primary market area, asubstantial portion of its debtors ability to honor their contracts isdependent upon the economic stability of the area.

 

The nature of the business ofthe company and bank may at times result in a certain amount of litigation.  The bank is involved in certain litigationthat is considered incidental to the normal conduct of business.  Management believes that the liabilities, ifany, resulting from the proceedings will not have a material adverse effect onthe consolidated financial position, consoloidated results of operations orconsolidated cash flows of the company.

 

Note 14 - OTHER EXPENSES

 

A summary of the componentsof other non-interest expense is as follows:

 
| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|------------------|------------|
| ** **             | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Data processing        |       | $                | 127,031    |   | $ | 87,161 |   | $ | 85,876 |   |
| Supplies               |       | 190,972          |       | 126,063 |   | 161,063 |   |
| Telephone              |       | 205,908          |       | 146,940 |   | 127,670 |   |
| Correspondent services |       | 140,182          |       | 75,931 |   | 71,690 |   |
| Insurance              |       | 149,482          |       | 113,064 |   | 89,491 |   |
| Postage                |       | 110,798          |       | 84,512 |   | 75,341 |   |
| Professional fees      |       | 189,525          |       | 194,380 |   | 175,600 |   |
| Other                  |       | 513,572          |       | 372,587 |   | 451,524 |   |
|                   |       | $                | 1,627,470  |   | $ | 1,200,638 |   | $ | 1,238,255 |   |

 

Note 15 - STOCK OPTIONS

 

TheCompany has adopted a Stock Option Plan under which an aggregate of 190,050 shareshave been reserved for issuance by the Company upon the grant of stock optionsor resstricted stock awards.  The numberof shares and average exercise price have been adjusted for the June 30, 20015% stock dividend and the February 28, 2002 5-for-4stock split.  The plan provides for the grant of options tokey employees and Directors as determined by a Stock Option Committee made upof at least two members of the Board of Directors. Options are execisable for aperiod of ten years from date of grant. 

 

50

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Stockoption transactions for the years ended December 31, 2004, 2003 and 2002 aresummarized as follows:

 
| ** **                       | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------------|------------|
| Outstanding January 1, 2002      |       | 157,830    |       | $                                     | 9.66       |   |
| Granted                          |       | 1,000      |       | 13.75                                 |       |
| Forfeited                        |       | 329        |       | 13.99                                 |       |
| Outstanding December 31, 2002    |       | 158,501    |       | 9.66                                  |       |
| Exercised                        |       | 9,388      |       | 8.54                                  |       |
| Granted                          |       | 3,500      |       | 18.84                                 |       |
| Forfeited                        |       | 1,850      |       | 11.78                                 |       |
| Outstanding December 31, 2003    |       | 150,763    |       | 9.91                                  |       |
| Exercised                        |       | 15,408     |       | 9.01                                  |       |
| Granted                          |       | 3,000      |       | 22.17                                 |       |
| Granted in acquisition           |       | 180,685    |       | 9.23                                  |       |
| Forfeited                        |       | 1,603      |       | 13.67                                 |       |
| Outstanding December 31, 2004    |       | 317,437    |       | $                                     | 9.66       |   |
| Exercisable at December 31, 2004 |       | 306,537    |       | $                                     | 9.62       |   |

 

In October 1995, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 123, “Accounting forStock Based Compensation” (SFAS 123) The statement defines a fair value basedmethod of accounting for employee stock options granted after December 31,1994.  However, SFAS 123 allows an entityto account for these plans according to Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees” (“APB 25”), provided pro formadisclosure of net income and earnings per share are made as if SFAS 123 hadbeen applied.  The Company has elected touse APB 25 and provide the required pro-forma disclosures.  Accordingly, no compensation cost has beenrecognized in the financial statements for the Company’s stock option plan.

 

The following summarizespro-forma data in accordance with SFAS 123: 

 
| ** **                                        | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                              |       |                        |       |   |   |   |   |
| Net income, pro-forma                             |       | $                           | 2,179,236  |   | $ | 1,772,921 |   | $ | 1,441,026 |   |
| Basic earnings/loss per common share,  pro-forma  |       | $                           | 1.15       |   | $ | 1.11 |   | $ | 0.91 |   |
| Diluted earnings loss per common share, pro-forma |       | $                           | 1.09       |   | $ | 1.07 |   | $ | 0.88 |   |

 

The fair value of each grant is estimated on the date of grant using theBlack-Sholes option pricing model.  The weightedaverage fair value of options granted, excluding those issued in the Dutch Forkacquisition, during 2004, 2003 and 2002 was $7.15, $5.62 and $4.90.  Those granted in conjunction with theacquisition had an average fair value of $14.32.

 

In calculating the pro-formadisclosures, the fair value of options granted is estimated as of the date ofgrant using the Black-Sholes option pricing model with the followingweighted-average assumptions: 

 
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield          |       | 1.0      | %          | 0.9      | %          | 1.5      | %          |
| Expected volatility     |       | 24.8     | %          | 25.4     | %          | 25.3     | %          |
| Risk-free interest rate |       | 4.3      | %          | 3.0      | %          | 4.8      | %          |
| Expected life           |       | 7 Years  |       | 7 Years  |       | 10 Years |       |

 

51

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Note16 - EMPLOYEE BENEFIT PLAN

 

The Company maintains a 401(k) plan which covers substantially all employees.  Participants may contribute up to the maximumallowed by the regulation.  During theyear ended December 31, 2004, 2003 and 2002 the plan expense amounted to$137,177, $106,398 and $93,130 respectively. The Company matches 50% of anemployees contribution up to a 6.00% participant contribution. 

 

Note 17 - EARNINGS PER SHARE

 

The following reconciles thenumerator and denominator of the basic and diluted earnings per sharecomputation: 

 
| ** **                                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Numerator (Included in basic and diluted  earnings per share) |       | $                           | 2,184,985  |   | $ | 1,797,481 |   | $ | 1,464,360 |   |
|                                                          |       |                        |       |   |   |   |   |
| Denominator                                                   |       |                        |       |   |   |   |   |
| Weighted average common shares outstanding  for:              |       |                        |       |   |   |   |   |
| Basic earnings per share                                      |       | 1,903,209                   |       | 1,590,052 |   | 1,587,970 |   |
| Dilutive securities:                                          |       |                        |       |   |   |   |   |
| Stock options - Treasury stock method                         |       | 102,536                     |       | 70,925 |   | 42,867 |   |
| Diluted earnings per share                                    |       | 2,005,745                   |       | 1,660,977 |   | 1,630,837 |   |
|                                                               |            |                             |            |  |  |  |  |  |  |  |

 

The average market price usedin calculating the assumed number of shares issued for the years ended December31, 2004, 2003 and 2002 was $21.67, $18.71 and $12.83, respectively. 

 

Note 18 - CAPITAL REQUIREMENTS AND DIVIDENDRESTRICTIONS

 

The Company and Bank are subject to various federal and state regulatoryrequirements, including regulatory capital requirements.  Failure to meet minimum capital requirementscan initiate certain mandatory, and possibly additional discretionary, actionsthat, if undertaken, could have a direct material effect on the Company’sfinancial statements.  Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,the Company and Bank must meet specific capital guidelines that involvequantitative measures of the Company’s assets, liabilities, and certainoff-balance sheet item as calculated under regulatory accounting practices.  The Company’s and Bank’s capital amounts andclassification are also subject to qualitative judgments by the regulatorsabout components,risk weighting, and other factors.  The Company and Bank are required to maintainminimum Tier 1 capital,total risked based capital and Tier 1 leverage ratios of4%, 8% and 3%, respectively. 

 

AtDecember 31, 2003, the most recent notification from the Comptroller of theCurrency categorized the bank as well capitalized under the regulatoryframework for prompt corrective action. To be well capitalized the bank must maintain minimum Tier 1 capital, totalrisk- based capital and Tier 1 leverage ratios of 6%, 10% and 5%,respectively.  There are no conditions orevents since that notification that management believes have changed the bank’swell capitalized status. 

 

52

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Theactual capital amounts and ratios as well as minimum amounts for each rqulatorydefined catyegory for the Bank and the Company are as follows:

 
| ** **                   | ** ** | **Actual** | ** ** | **Required to be Categorized  Aduquately Capitalized** | ** ** | **Required to be  Categorized  Well Capitalized** | ** ** |
|------------------------------|------------|------------|------------|--------------------------------------------------------|------------|---------------------------------------------------|------------|
|                         |       | **Amount** | ** ** | **Ratio**                                              | ** ** | **Amount**                                        | ** ** | **Ratio** |   |   |   |   |   |
| December 31, 2004            |       |       |       |                                                   |       |                                              |       |   |   |   |   |   |   |
| First Community  Corporation |       |       |       |                                                   |       |                                              |       |   |   |   |   |   |   |
| Tier 1 Capital               |       | $          | 37,485,000 |                                                   | 12.91      | %                                                 | $          | 11,612,000 |   | 4.00 | % | N/A |   | N/A |   |
| Total Risked  Based Capital  |       | 40,249,000 |       | 13.86                                                  | %          | 23,224,000                                        |       | 8.00 | % | N/A |   | N/A |   |
| Tier 1 Leverage              |       | 37,485,000 |       | 8.51                                                   | %          | 17,614,000                                        |       | 4.00 | % | N/A |   | N/A |   |
| First Community  Bank, NA    |       |       |       |                                                   |       |                                              |       |   |   |   |   |   |   |
| Tier 1 Capital               |       | $          | 33,158,000 |                                                   | 11.46      | %                                                 | $          | 11,576,000 |   | 4.00 | % | $ | 17,364,000 |   | 6.00 | % |
| Total Risked  Based Capital  |       | 35,922,000 |       | 12.41                                                  | %          | 23,152,000                                        |       | 8.00 | % | 28,940,000 |   | 10.00 | % |
| Tier 1 Leverage              |       | 33,158,000 |       | 7.64                                                   | %          | 17,367,000                                        |       | 4.00 | % | 21,703,000 |   | 5.00 | % |
|                         |       |       |       |                                                   |       |                                              |       |   |   |   |   |   |   |
| December 31, 2003            |       |       |       |                                                   |       |                                              |       |   |   |   |   |   |   |
| First Community  Corporation |       |       |       |                                                   |       |                                              |       |   |   |   |   |   |   |
| Tier 1 Capital               |       | $          | 18,607,000 |                                                   | 13.21      | %                                                 | $          | 5,635,000 |   | 4.00 | % | N/A |   | N/A |   |
| Total Risked  Based Capital  |       | 20,312,000 |       | 14.42                                                  | %          | 11,269,000                                        |       | 8.00 | % | N/A |   | N/A |   |
| Tier 1 Leverage              |       | 18,607,000 |       | 8.87                                                   | %          | 8,395,000                                         |       | 4.00 | % | N/A |   | N/A |   |
| First Community  Bank, NA    |       |       |       |                                                   |       |                                              |       |   |   |   |   |   |   |
| Tier 1 Capital               |       | $          | 15,295,000 |                                                   | 10.90      | %                                                 | $          | 5,613,000 |   | 4.00 | % | $ | 8,419,000 |   | 6.00 | % |
| Total Risked  Based Capital  |       | 17,000,000 |       | 12.12                                                  | %          | 11,225,000                                        |       | 8.00 | % | 14,031,000 |   | 10.00 | % |
| Tier 1 Leverage              |       | 15,295,000 |       | 7.39                                                   | %          | 8,280,000                                         |       | 4.00 | % | 10,351,000 |   | 5.00 | % |

 

Underapplicable federal law, the Comptroller of the Currency restricts a nationalbank’s total dividend payments in any calendar year to net profits of that yearcombined ‘with retained net profits for the two preceding years At December 31,2004, there was $5,106,000 in retained net profits free of such restriction. 

 

53

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Note19 - PARENT COMPANY FINANCIAL INFORMATION

 

Thebalance sheets, statements of operations and cash flows for First CommunityCorporation (Parent Only) follow:

 

Condensed Balance Sheets

 
| ** **                                      | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **2004**            | ** ** | **2003** | ** ** |
| Assets:                                         |       |                |       |   |   |
| Cash on deposit                                 |       | $                   | 3,051,478  |   | $ | 169,125 |   |
| Interest-bearing deposits with the bank         |       | —              |       | 504,817 |   |
| Securities purchased under agreement to  resell |       | 15,304              |       | 1,402,615 |   |
| Investment securities available-for-sale        |       | 1,360,000           |       | 1,250,000 |   |
| Investment in bank subsidiary                   |       | 61,135,575          |       | 16,197,320 |   |
| Other                                           |       | 537,321             |       | 20,756 |   |
| Total assets                                    |       | $                   | 66,099,678 |   | $ | 19,544,633 |   |
|                                            |       |                |       |   |   |
| Liabilities:                                    |       |                |       |   |   |
| Long-term debt                                  |       | $                   | 15,464,000 |   | $ | — |   |
| Other                                           |       | 172,989             |       | 35,819 |   |
| Total liabilities                               |       | 15,636,989          |       | 35,819 |   |
|                                            |       |                |       |   |   |
| Shareholders’ equity                       |       | 50,462,689          |       | 19,508,814 |   |
| Total liabilities and shareholders’ equity |       | $                   | 66,099,678 |   | $ | 19,544,633 |   |

 

CondensedStatements of Operations

 
| ** **                                      | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income:                                         |       |                        |       |   |   |   |   |
| Interest income                                 |       | $                           | 72,795     |   | $ | 75,711 |   | $ | 120,358 |   |
| Dividend income from bank subsidiary            |       | 366,000                     |       | 225,160 |   |   |   |
| Equity in undistributed earnings of  subsidiary |       | 2,073,865                   |       | 1,556,937 |   | 1,475,434 |   |
| Total income                                    |       | 2,512,660                   |       | 1,857,808 |   | 1,595,792 |   |
| Expenses:                                       |       |                        |       |   |   |   |   |
| Interest expense                                |       | 214,813                     |       | — |   | — |   |
| Other                                           |       | 112,862                     |       | 60,327 |   | 131,432 |   |
| Total expense                                   |       | 327,675                     |       | 60,327 |   | 131,432 |   |
| Income before taxes                             |       | 2,184,985                   |       | 1,797,481 |   | 1,464,360 |   |
| Income taxes                                    |       | —                      |       | — |   | — |   |
| Net Income                                      |       | $                           | 2,184,985  |   | $ | 1,797,481 |   | $ | 1,464,360 |   |

 

54

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CondensedStatements of Cash Flows

 
| ** **                                                                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                    | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows from operating activities:                                         |       |                        |       |   |   |   |   |
| Net Income                                                                    |       | $                           | 2,184,985  |   | $ | 1,797,481 |   | $ | 1,464,360 |   |
| Adjustments to reconcile net income to net cash  used by operating activities |       |                        |       |   |   |   |   |
| Increase in equity in undistributed  earnings of subsidiary                   |       | (2,073,865                  | )          | (1,556,937 | ) | (1,475,434 | ) |
| Other-net                                                                     |       | 84,600                      |       | (54,105 | ) | 67,962 |   |
| Net cash provided (used) by operating  activities                             |       | 195,720                     |       | 186,439 |   | 56,888 |   |
|                                                                          |       |                        |       |   |   |   |   |
| Cash flows from investing activities:                                         |       |                        |       |   |   |   |   |
| Purchase of investment security  available-for-sale                           |       | (110,000                    | )          | (1,250,000 | ) | (750,000 | ) |
| Maturity of investment security  available-for-sale                           |       | —                      |       | 1,750,000 |   | 750,000 |   |
| Investment in bank subsidiary                                                 |       | (2,897,905                  | )          | — |   | — |   |
| Net cash disbursed in business combination                                    |       | (11,131,142                 | )          | — |   | — |   |
| Net cash provided (used) by investing  activities                             |       | (14,139,047                 | )          | 500,000 |   | — |   |
|                                                                          |       |                        |       |   |   |   |   |
| Cash flows from financing activities:                                         |       |                        |       |   |   |   |   |
| Cash in lieu of fractional shares                                             |       | —                      |       | — |   | (4,181 | ) |
| Dividends paid                                                                |       | (381,878                    | )          | (301,973 | ) | (190,555 | ) |
| Proceeds from issuance of long-term debt                                      |       | 15,000,000                  |       | — |   | — |   |
| Proceeds from issuance of common stock                                        |       | 315,430                     |       | 100,586 |   | — |   |
| Net cash provided by financing activities                                     |       | 14,933,552                  |       | (201,387 | ) | (194,736 | ) |
|                                                                          |       |                        |       |   |   |   |   |
| Increase in cash and cash equivalents                                         |       | 990,225                     |       | 485,052 |   | (137,848 | ) |
| Cash and cash equivalent, beginning of  period                                |       | 2,076,557                   |       | 1,591,505 |   | 1,729,353 |   |
| Cash and cash equivalent, end of period                                       |       | $                           | 3,066,782  |   | $ | 2,076,557 |   | $ | 1,591,505 |   |

 

55

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NOTE20 - RECENT ACCOUNTING PRONOUNCEMENTS

 

InApril 2003, the FASB issued SFAS No. 149, *“Amendmentof Statement 133 on Derivative Instruments and Hedging Activities”,*whichamends and clarifies accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and loan commitments that relate tothe origination of mortgage loans held for sale, and for hedging activitiesunder SFAS No. 133, *“Accounting forDerivative Instruments and Hedging Activities”.*  SFAS No. 149 clarifies under whatcircumstances a contract with an initial net investment meets thecharacteristics of a derivative, clarifies when a derivative contains afinancing component, amends the definition of an underlying to conform it tolanguage used in FASB Interpretation (“FIN”) NO. 45, and amends certain otherexisting pronouncements.  Thepronouncement was generally effective for contracts entered into or modifiedafter June 30, 2003.  The adoption ofSFAS No. 149 did not have any impact on the financial condition or operatingresults of the Company.

 

InDecember 2004, the FASB issued SFAS No. 153, *“Exchangesof Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions”.* The amendments made by SFAS No. 153 are based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged.  Further, theamendments eliminate the narrow exception for nonmonetary exchanges of similarproductive assets and replace it with a broader exception for exchanges ofnonmonetary assets that do not have commercial substance.  Previously, Accounting Principles Board (“APB”)Opinion No. 29 required that the accounting for an exchange of a productiveasset for a similar productive asset or an equivalent interest in the same orsimilar productive asset should be based on the recorded amount of the assetrelinquished.  APB Opinion No. 29provided an exception to its basic measurement principle (fair value) forexchanges of similar productive assets. SFAS No. 153 is effective for nonmonetary asset exchanges occurring infiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchangesoccurring in fiscal periods beginning after the date of issuance.  The provisions of this statement are requiredto be applied prospectively.  Theadoption of this statement is not expected to have a material impact on thefinancial condition or operating results of the Company.

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), *“Share-Based Payment”*(SFAS No. 123(R)”).* *SFASNo. 123(R) will require companies to measure all employee stock-basedcompensation awards using a fair value method and record such expense in itsfinancial statements.  In addition, theadoption of SFAS No. 123(R) requires additional accounting and disclosurerelated to the income tax and cash flow effects resulting from share-basedpayment arrangements.  SFAS No. 123(R) iseffective beginning as of the first interim or annual reporting periodbeginning after December 15, 2005.  TheCompany is evaluating the impact that the adoption of SFAS No. 123(R) will haveon its financial position, results of operations and cash flows.

 

InNovember 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”*.  FIN No. 45 elaborates on the disclosure to bemade by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees and warranties that it has issued.  FIN 45 requires a company, at the time itissues a guarantee, to recognize an initial liability for the fair value ofobligations assumed under the guarantee. The initial recognition requirements of FIN No. 45 were effective forguarantees issued or modified after December 31, 2002.  The disclosure requirements were effectivefor financial statements for periods ending after December 15, 2002.  The adoption of FIN No. 45 did not have amaterial impact on the Company’s financial position or results of operations.

 

InDecember 2003, the FASB issued FIN No. 46 (revised), *“Consolidation of Variable Interest Entities”* (FIN No. 46(R)”),which addresses consolidation by business enterprises of variable interestentities.  FIN No. 46(R) requires avariable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or entitled to receive a majority of the entity’s residual returns,or both.  FIN No. 46(R) also requiresdisclosures about variable interest entities that a company is not required toconsolidate, but in which it has a significant variable interest.  FIN No. 46(R) provides guidance fordetermining whether an entity qualifies as a variable interest entity byconsidering, among other considerations, whether the entity lacks sufficientequity or its equity holders lack adequate decision-making ability.  The consolidation requirements of FIN No.46(R) applied immediately to variable interest entities created after January31, 2003.  The consolidation requirementsapplied to the Company’s existing variable interest entities in the firstreporting period ending December 15, 2004. Certain of the disclosure requirements applied to all financialstatements issued after December 31, 2003, regardless of when the variableinterest entity was established.  Theadoption of FIN No. 46(R) did not have any impact on the Company’s financialposition or results of operations.

 

56

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InNovember 2003, the Emerging Issues Task Force (“EITF”) reached a consensus thatcertain quantitative and qualitative disclosures should be required for debtand marketable equity securities classified as available-for-sale orheld-to-maturity under SFAS No. 115 and SFAS No. 124 that are impaired at thebalance sheet date but for which other-than-temporary impairment has not beenrecognized.  Accordingly to the EITFissued EITF No. 03-1, *“The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”.*  This issue addresses the meaning ofother-than-temporary impairment and its application to investments classifiedas either available-for-sale or held-to-maturity under SFAS No. 115 andprovides guidance on quantitative and qualitative disclosures.  The disclosure requirements of EITF No. 03-1are effective for annual financial statements for fiscal years ending afterJune 15, 2004.  The effective date forthe measurement and recognition guidance of EITF No. 03-1 has beendelayed.  The FASB staff has issued aproposed Board-directed FASB Staff Position (“FSP”), FSP EITF 03-01-a, *“Implementation Guidance for the Application ofParagraph 16 of Issue No. 03-1”.* The proposed FSP would provide implementation guidance with respect todebt securities that are impaired solely due to interest rates and/or sectorspreads and analyzed for other-than-temporary impairment under the measurementand recognition requirements of EITF NO. 03-1. The delay of the effective date for the measurement and recognitionrequirements of EITF No. 03-1 will be superseded concurrent with the finalissuance of FSP EITF 03-1-a.  Adoptingthe disclosure provisions of EITF No. 03-1 did not have any material impact onthe company’s financial position or results of operations.

 

57

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**Item 13.  Exhibits.**
| 3.1    |   | Amended and Restated  Articles of Incorporation (incorporated by reference to Exhibit 3.1 to  the company’s Registration Statement No. 33-86258 on Form S-1).                                                                                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 3.2    |   | Bylaws (incorporated by  reference to Exhibit 3.2 to the company’s Registration Statement  No. 33- 86258 on Form S-1).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 4.1    |   | Provisions in the  company’s Articles of Incorporation and Bylaws defining the rights of holders  of the company’s Common Stock (incorporated by reference to Exhibit 4.1  to the company’s Registration Statement No. 33-86258 on Form S-1). |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.1   |   | Employment Agreement dated  June 1, 1994, by and between Michael C. Crapps and the Company (incorporated  by reference to Exhibit 10.1 to the company’s Registration Statement  No. 33-86258 on Form S-1).*                                        |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.2   |   | Employment Agreement dated  June 1, 1994, by and between James C. Leventis and the Company (incorporated  by reference to Exhibit 10.2 to the company’s Registration Statement  No. 33-86258 on Form S-1).*                                                  |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.3   |   | 1996 Stock Option Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.6 to the company’s annual report for fiscal year ended December 31, 1995 on Form 10-KSB).*                                                                                |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.4   |   | First Community  Corporation 1999 Stock Incentive Plan and Form of Option Agreement  (incorporated by reference to the Company’s 1998 Annual Report and Form  10-KSB).*                                                                                                |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.5   |   | Employment Agreement dated  September 2, 2002 by and between David K. Proctor and the Company (incorporated  by reference to Exhibit 10.4 to the company’s 2002 annual report and  Form 10-KSB).*                                                                 |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.6   |   | Employment Agreement dated  June 12, 2002 by and between Joseph G. Sawyer and the Company (incorporated  by reference to Exhibit 10.5 to the company’s 2002 annual report and  Form 10-KSB).*                                                                |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 21.1   |   | Subsidiaries of the  company. +                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 23     |   | Consent of Certified Public Accountants.                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 31.1   |   | Rule  13a-14(a) Certification of the Chief Executive Officer.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 31.2   |   | Rule 13a-14(a) Certification of the Chief  Financial Officer.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 32     |   | Section 1350 Certifications.                                                                                                                                                                                                                                                |

----

| *      |   | Management contract of  compensatory plan or arrangement required to be filed as an Exhibit to this  Annual Report on Form 10-KSB. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                               |   |   |   |   |   |   |
| +      |   | Previously filed                                                                                                                   |

 

3

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**SIGNATURES**

** **

In accordance with Section 13or 15(d) of the Exchange Act, the registrant caused this Amendment No. 1 to theForm 10-KSB filed on March 25, 2005, to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** **            | **FIRST  COMMUNITY CORPORATION**       |
|-----------------------|----------------------------------------|
|                  |                                   |
| Date:  March 28, 2005 | /s/  Michael C. Crapps                 |
|                  | Michael  C. Crapps                     |
|                  | President  and Chief Executive Officer |

 

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Signature**           | ** **             | **Title**                         | ** **           | **Date**        |
|-------------------------|------------------------|-----------------------------------|----------------------|-----------------|
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| Richard  K. Bogan       |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| Thomas  C. Brown        |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| Chimin  J. Chao         |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  Michael C. Crapps  |                   | Director,  President,             |                 | March  28, 2005 |
| Michael  C. Crapps      |                   | &  Chief Executive Officer    |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| Anita  B. Easter        |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| O.  A. Ethridge         |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| George  H. Fann, Jr.    |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| W.  James Kitchens, Jr. |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director,  Chairman of the        |                 |            |
| James  C. Leventis      |                   | Board,  & Secretary           |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| Loretta  R. Whitehead   |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Director                          |                 |            |
| Mitchell  M. Willoughby |                   |                              |                 |            |
|                    |                   |                              |                 |            |
| /s/  *                  |                   | Chief  Financial Officer          |                 |            |
| Joseph  G. Sawyer       |                   | and  Principal Accounting Officer |                 |            |
|                    |                   |                              |                 |            |
| *  By:                  | /s/  Michael C. Crapps |                              | As  Attorney-In-Fact |            | March  28, 2005 |
|                    | Michael  C. Crapps     |                              |                 |            |   |

 

4

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**ExhibitList**

 
| 3.1    |   | Amended and Restated  Articles of Incorporation (incorporated by reference to Exhibit 3.1 to  the company’s Registration Statement No. 33-86258 on Form S-1).                                                                                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 3.2    |   | Bylaws (incorporated by  reference to Exhibit 3.2 to the company’s Registration Statement  No. 33- 86258 on Form S-1).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 4.1    |   | Provisions in the  company’s Articles of Incorporation and Bylaws defining the rights of holders  of the company’s Common Stock (incorporated by reference to Exhibit 4.1  to the company’s Registration Statement No. 33-86258 on Form S-1). |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.1   |   | Employment Agreement dated  June 1, 1994, by and between Michael C. Crapps and the Company (incorporated  by reference to Exhibit 10.1 to the company’s Registration Statement  No. 33-86258 on Form S-1).*                                        |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.2   |   | Employment Agreement dated  June 1, 1994, by and between James C. Leventis and the Company (incorporated  by reference to Exhibit 10.2 to the company’s Registration Statement  No. 33-86258 on Form S-1).*                                                  |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.3   |   | 1996 Stock Option Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.6 to the company’s annual report for fiscal year ended December 31, 1995 on Form 10-KSB).*                                                                                |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.4   |   | First Community  Corporation 1999 Stock Incentive Plan and Form of Option Agreement  (incorporated by reference to the Company’s 1998 Annual Report and Form  10-KSB).*                                                                                                |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.5   |   | Employment Agreement dated  September 2, 2002 by and between David K. Proctor and the Company (incorporated  by reference to Exhibit 10.4 to the company’s 2002 annual report and  Form 10-KSB).*                                                                 |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 10.6   |   | Employment Agreement dated  June 12, 2002 by and between Joseph G. Sawyer and the Company (incorporated  by reference to Exhibit 10.5 to the company’s 2002 annual report and  Form 10-KSB).*                                                                |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 21.1   |   | Subsidiaries of the  company. +                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 23     |   | Consent of Certified Public Accountants.                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 31.1   |   | Rule 13a-14(a)  Certification of the Chief Executive Officer.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 31.2   |   | Rule 13a-14(a) Certification of the Chief  Financial Officer.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |
| 32     |   | Section 1350 Certifications.                                                                                                                                                                                                                                                |

----

| *      |   | Management contract of  compensatory plan or arrangement required to be filed as an Exhibit to this  Annual Report on Form 10-KSB. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                               |   |   |   |   |   |   |
| +      |   | Previously filed                                                                                                                   |

 

5

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