**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**Form 10-KSB**

 

**(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 CommunityCorporation**

(Name of Small Business Issuer in ItsCharter)

 

| **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 AreaCode

 

Securities registered pursuant to Section12(b) of the Act:  **None**.

Securities registered pursuant to Section12(g) of the Act: **Common Stock.**

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or 15(d)of the Exchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject tosuch filing requirements for past 90 days. Yes ý No  o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B in this form, and no disclosure will be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendmentto this Form 10-KSB.  ý

 

The issuer’s revenue for itsmost recent fiscal year was $14,818,945.

 

The aggregate market value ofthe voting stock as of March 15, 2005, held by non-affiliates of the registrantbased on the closing price as of March 15, 2005, was $49,977,519.

 

2,830,962 shares of the issuer’scommon stock were issued and outstanding as of March 15, 2005.

 

**Documents Incorporated 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 Disclosure Format. (Check one): Yes o  No  ý

 

 

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**TABLE OF CONTENTS**

 
| PART I                                                                                         |                                                                                                                       |
|------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                                                                                           | Item 1. Description  of Business                                                                                      |   |
|                                                                                           | Item 2.  Description of Property                                                                                      |   |
|                                                                                           | Item 3. Legal  Proceedings                                                                                            |   |
|                                                                                           | Item 4.  Submission of Matters to a Vote of Security Holders                                                          |   |
| PART II                                                                                        |                                                                                                                       |
|                                                                                           | Item 5.  Market for Common Equity and Related Stockholder Matters                                                     |   |
|                                                                                           | Item 6.  Management’s Discussion and Analysis or Plan of Operation                                               |   |
|                                                                                           | Item 7. Financial  Statements                                                                                         |   |
| Consolidated Balance Sheets                                                                    |                                                                                                                       |
| Consolidated  Statements of Income                                                             |                                                                                                                       |
| Consolidated Statements of  Comprehensive Income                                               |                                                                                                                       |
| Consolidated  Statement of Changes in Shareholder’s Equity                                |                                                                                                                       |
| Consolidated  Statements of Cash Flows                                                         |                                                                                                                       |
| Notes to  Consolidated Financial Statements                                                    |                                                                                                                       |
| Item  8. Changes in and Disagreements with Accountants on Accounting and Financial  Disclosure |                                                                                                                       |
| Item 8A. Controls and  Procedures                                                              |                                                                                                                       |
| Item  8B. Other Information                                                                    |                                                                                                                       |
| Part  III                                                                                      |                                                                                                                       |
|                                                                                           | Item  9. Directors, Executive Officers, Promoters, and Control Persons; Compliance  with Section 16(a) of the Exchange Act |   |
|                                                                                           | Item 10. Executive  Compensation                                                                                           |   |
|                                                                                           | Item  11. Security Ownership of Certain Beneficial Owners and Management and  Related Stockholder Matters.                 |   |
|                                                                                           | Item  12. Certain Relationships and Related Transactions                                                                   |   |
|                                                                                           | Item 13. Exhibits                                                                                                          |   |
|                                                                                           | Item 14.  Principal Accountant Fees and Services                                                                           |   |
| SIGNATURES                                                                                     |                                                                                                                       |
|                                                                                                |                                                                                                                            |  |  |

 

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**PART I**

 

**Item 1.Description of Business.**

 

ThisReport contains statements which constitute forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and the SecuritiesExchange Act of 1934.  These statementsare based on many assumptions and estimates and are not guarantees of futureperformance.  Our actual results maydiffer materially from those projected in any forward-looking statements, asthey will depend on many factors about which we are unsure, including manyfactors which are beyond our control. The words “may,”  “would,” “could,”“will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” aswell as similar expressions, are meant to identify such forward-lookingstatements.  Potential risks anduncertainties include, but are not limited to those described below under “RiskFactors.”

 

**General**

 

First Community Corporation, a bank holding companyregistered under the Bank Holding Company Act of 1956, was incorporated underthe laws of South Carolina in 1994 primarily to own and control all of thecapital stock of First Community Bank, N.A., which commenced operations inAugust 1995.  On October 1, 2004, weconsummated our acquisition of DutchFork Bancshares, Inc. and its wholly-ownedsubsidiary, Newberry Federal Savings Bank. We engage in a commercial banking business from our main office inLexington, South Carolina and our 10 full-service offices located in Lexington,Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin, Northeast Columbia,Prosperity, and Newberry (two).  We offera wide-range of traditional banking products and services for professionals andsmall- to medium-sized businesses, including consumer and commercial, mortgage,brokerage and investment, and insurance services.  We also offer online banking to ourcustomers.  Our stock trades on theNASDAQ SmallCap market under the symbol FCCO.

 

**RiskFactors**

 

***Our recentoperating results may not be indicative of our future operating results.***

 

Wemay not be able to sustain our historical rate of growth and may not even beable to grow our business at all. Because of our relatively short operating history, it will bedifficult for us to generate similar earnings growth as we continue to expand,and consequently our historical results of operations will not necessarily beindicative of our future operations. Various factors, such as economic conditions, regulatory and legislativeconsiderations, and competition, may also impede our ability to expand ourmarket presence.  If we experience asignificant decrease in our historical rate of growth, our results ofoperations and financial condition may be adversely affected because a highpercentage of our operating costs are fixed expenses.

 

***Our decisions regarding credit risk andreserves for loan losses may materially and adversely affect our business.***

 

Making loans and other extensions of credit is an essential element ofour business.  Although we seek tomitigate risks inherent in lending by adhering to specific underwritingpractices, our loans and other extensions of credit may not be repaid.  The risk of nonpayment is affected by anumber of factors, including:

 

•                  theduration of the credit;

•                  creditrisks of a particular customer;

•                  changesin economic and industry conditions; and

•                  inthe case of a collateralized loan, risks resulting from uncertainties about thefuture value of the collateral.

 

We attempt to maintain an appropriate allowance for loan losses toprovide for potential losses in our loan portfolio.  We periodically determine the amount of theallowance based on consideration of several factors, including:

 

•                  anongoing review of the quality, mix, and size of our overall loan portfolio;

•                  ourhistorical loan loss experience;

•                  evaluationof economic conditions;

•                  regularreviews of loan delinquencies and loan portfolio quality; and

•                  theamount and quality of collateral, including guarantees, securing the loans.

 

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There is no precise method of predicting credit losses; therefore, weface the risk that charge-offs in future periods will exceed our allowance forloan losses and that additional increases in the allowance for loan losses willbe required.  Additions to the allowancefor loan losses would result in a decrease of our net income, and possibly ourcapital.

 

***Lack of seasoning of our loanportfolio may increase the risk of credit defaults in the future.***

 

Dueto the rapid growth of our bank over the past several years and our relativelyshort operating history, a large portion of the loans in our loan portfolio andof our lending relationships are of relatively recent origin.  In general, loans do not begin to show signsof credit deterioration or default until they have been outstanding for some periodof time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave morepredictably than a newer portfolio. Because our loan portfolio is relatively new, the current level ofdelinquencies and defaults may not be representative of the level that willprevail when the portfolio becomes more seasoned, which may be higher thancurrent levels.  If delinquencies anddefaults increase, we may be required to increase our provision for loanlosses, which would adversely affect our results of operations and financialcondition.

 

***We may experience difficulties in managing our growth and ineffectively integrating DutchFork.***

 

Theacquisition of DutchFork was our first acquisition.  Accordingly, we have no experience inintegrating another institution’s operations with our company.  There can be no assurances that we will beable to adequately and profitably manage our growth and effectively integratethe operations of DutchFork.  AcquiringDutchFork will involve risks commonly associated with acquisitions, including:

 

•                       potential exposure to liabilities ofDutchFork;

•                       difficulty and expense of integrating theoperations and personnel of DutchFork;

•                       potential disruption to our business;

•                       potential diversion of the time and attentionof our management; and

•                       impairment of relationships with, and thepossible loss of, key employees and customers of DutchFork.

 

*****Increases in interest rates could adversely affect the combinedcompanies’ investment portfolio.*****

 

****Due to the size of the DutchFork’sinvestment portfolio, periods of extreme volatility in interest rates canheavily impact cash flows from the investment portfolio.  This results when call options by issuers areexercised and prepayments increase dramatically.  During these periods alternative reinvestmentopportunities are also heavily impacted. In an attempt to manage current and future interest rate spreads,control liquidity, and preserve investment value, DutchFork management hadperiodically restructured portions of its investment portfolio.  These restructurings have resulted inpositive income gains for DutchFork for the years ended September 30, 2004 and2003.  Restructuring also can impactfuture income capabilities due to lower rates of return afforded from reinvestmentopportunities.  Future changes in theinterest rate and economic environment may require management to restructureportions of the investment portfolio. There can be no assurance that future restructurings will result in thepositive gains experienced in prior periods nor that interest rate spreads willbe preserved at the levels previously experienced.****

 

***An economic downturn, especially one affecting the Lexington, Richland,and Newberry Counties and the surrounding areas, could reduce our customerbase, our level of deposits, and demand for financial products such as loans.***

 

Oursuccess significantly depends upon the growth in population, incomelevels, deposits, and housing starts in our market of Lexington, Richland, andNewberry Counties and the surrounding area. If the community in which we operate does not grow or if prevailingeconomic conditions locally or nationally are unfavorable, our business may notsucceed.  An economic downturn wouldlikely contribute to the deterioration of the quality of our loan portfolio andreduce our level of deposits, which in turn would hurt our business.  If an economic downturn occurs in the economyas a whole, or in Lexington, Richland, or Newberry Counties and the surroundingarea, borrowers may be less likely to repay their loans as scheduled.  Moreover, the value of real estate or othercollateral that may secure our loans could be adversely affected.  Unlike many larger institutions, we are notable to spread the

 

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risks of unfavorable local economic conditions across a large number ofdiversified economies.  An economicdownturn could, therefore, result in losses that materially and adverselyaffect our business.

 

***Changes in prevailing interest rates mayreduce our profitability.***

 

Our results of operations depend in large part upon the level of ournet interest income, which is the difference between interest income frominterest-earning assets, such as loans and mortgage-backed securities, andinterest expense on interest-bearing liabilities, such as deposits and otherborrowings.  Depending on the terms andmaturities of our assets and liabilities, a significant change in interestrates could have a material adverse effect on our profitability.  Many factors cause changes in interest rates,including governmental monetary policies and domestic and internationaleconomic and political conditions.  Whilewe intend to manage the effects of changes in interest rates by adjusting theterms, maturities, and pricing of our assets and liabilities, our efforts maynot be effective and our financial condition and results of operations couldsuffer.  After operating in ahistorically low interest rate environment, the Federal Reserve began raisingshort-term interest rates in the second quarter of 2004.  Because we were asset sensitive at December31, 2004, we anticipate that we will benefit from a rising interest rateenvironment.  However, no assurance canbe given that the Federal Reserve will actually continue to raise interestrates or that the results we anticipate will actually occur.

 

***We are dependent on key individuals, and theloss of one or more of these key individuals could curtail our growth andadversely affect our prospects.***

 

MichaelC. Crapps, our president and chief executive officer, has extensive andlong-standing ties within our primary market area and substantial experiencewith our operations, and he has contributed significantly to our growth.  If we lose the services of Mr. Crapps, hewould be difficult to replace and our business and development could bematerially and adversely affected.

 

Oursuccess also depends, in part, on our continued ability to attract and retainexperienced loan originators, as well as other management personnel.  The loss of the services of several of suchkey personnel could adversely affect our growth strategy and prospects to theextent we are unable to replace such personnel.

 

***We are subject to extensive regulation thatcould limit or restrict our activities.***

 

We operate in a highly regulated industry and aresubject to examination, supervision, and comprehensive regulation by variousregulatory agencies.  Our compliance withthese regulations is costly and restricts certain of our activities, includingpayment of dividends, mergers and acquisitions, investments, loans and interestrates charged, interest rates paid on deposits, and locations of offices.  We are also subject to capitalizationguidelines established by our regulators, which require us to maintain adequatecapital to support our growth.

 

The laws and regulations applicable to the bankingindustry could change at any time, and we cannot predict the effects of thesechanges on our business and profitability. Because government regulation greatly affects the business and financialresults of all commercial banks and bank holding companies, our cost ofcompliance could adversely affect our ability to operate profitably.

 

The Sarbanes-Oxley Act of 2002, and the relatedrules and regulations promulgated by the Securities and Exchange Commissionthat are now applicable to us, have increased the scope, complexity, and costof corporate governance, reporting, and disclosure practices.  To comply with the Sarbanes-Oxley Act, wehave hired an outside consultant to assist with our internal audit and internalcontrol functions. We have experienced, and we expect to continue toexperience, greater compliance costs, including costs related to internalcontrols, as a result of the Sarbanes-Oxley Act.

 

***Our continued pace of growth may require usto raise additional capital in the future, but that capital may not beavailable when it is needed.***

 

We are required by regulatory authorities tomaintain adequate levels of capital to support our operations.  To support our continued growth, we may needto raise additional capital.  Our abilityto raise additional capital, if needed, will depend in part on conditions inthe capital markets at that time, which are outside our control.  Accordingly, we cannot assure you of ourability to raise additional capital, if needed, on terms acceptable to us.  If we cannot raise additional capital whenneeded, our ability to further expand our operations through internal growth

 

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andacquisitions could be materially impaired. In addition, if we decide to raise additional equity capital, yourinterest could be diluted.

 

***We face strong competition forclients, which could prevent us from obtaining clients and may cause us to payhigher interest rates to attract clients.***

 

The banking business is highly competitive, and weexperience competition in our market from many other financialinstitutions.  We compete with commercialbanks, credit unions, savings and loan associations, mortgage banking firms, consumerfinance companies, securities brokerage firms, insurance companies, moneymarket funds, and other mutual funds, as well as other super-regional,national, and international financial institutions that operate offices in ourprimary market areas and elsewhere.  Wecompete with these institutions both in attracting deposits and in makingloans.  In addition, we have to attractour client base from other existing financial institutions and from newresidents.  Many of our competitors arewell-established, larger financial institutions.  These institutions offer some services, suchas extensive and established branch networks, that we do not provide.  There is a risk that we will not be able tocompete successfully with other financial institutions in our market, and thatwe may have to pay higher interest rates to attract deposits, resulting inreduced profitability.  In addition,competitors that are not depository institutions are generally not subject tothe extensive regulations that apply to us.

 

***We will face risks with respect to future expansion and acquisitions ormergers.***

 

We may seek toacquire other financial institutions or parts of those institutions.  We may also expand into new markets or linesof business or offer new products or services. These activities would involve a number of risks, including:

 

•                  thepotential inaccuracy of the estimates and judgments used to evaluate credit,operations, management, and market risks with respect to a target institution;

 

•                  thetime and costs of evaluating new markets, hiring or retaining experienced localmanagement, and opening new offices and the time lags between these activitiesand the generation of sufficient assets and deposits to support the costs ofthe expansion;

 

•                  theincurrence and possible impairment of goodwill associated with an acquisitionand possible adverse effects on our results of operations; and

 

•                  therisk of loss of key employees and customers.

 

**Location and Service Area**

 

The bank is engaged in a general commercial andretail banking business, emphasizing the needs of small-to-medium sizedbusinesses, professional concerns and individuals, primarily in Richland andLexington counties of South Carolina and the surrounding area.  Our main office is located in Lexington,South Carolina and our 10 full-service offices are located in Lexington, ForestAcres, Irmo, Cayce-West Columbia, Gilbert, Chapin, Northeast Columbia,Prosperity, and Newberry (two).  See ItemII, “Description of Properties.”

 

Lexington County and Richland County are located inthe geographic center of the state of South Carolina. Columbia, the capital ofSouth Carolina, is located within and divided between these two counties.  Columbia can be reached via three interstatehighways: I-20, I-26, and I-77 . Columbia is served by several airlines as wellas by passenger and freight rail service. According to the U. S. Census Bureau, Richland and Lexington Counties,which include the primary service areas for the existing six sites of the bank,had an estimated population in 2003 of 558,632. Lexington County had an estimated population of 226,528 and RichlandCounty had an estimated population of 332,104. The principal components of the economy within our market area areservice industries, government, and wholesale and retail trade.  The largest employers in the area each ofwhich employs in excess of 3,000 people in the Midlands area, include FortJackson Army Base, the University of South Carolina, Palmetto Health Alliance,Blue Cross Blue Shield and SCANA Corporation. The area has experienced steady growth over the past 10 years and weexpect that the area, as well as the service industry needed to support it,will to continue to grow.  Both Richlandand Lexington Counties have one of the highest per capita personal incomes inthe state at $28,318 and $28,981 in 2002, respectively, compared to $25,502 forSouth Carolina as a whole.

 

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**Banking Services**

 

We offer a full range of deposit services that aretypically available in most banks and savings and loan associations, includingchecking accounts, NOW accounts, savings accounts and other time deposits ofvarious types, ranging from daily money market accounts to longer-termcertificates of deposit.  The transactionaccounts and time certificates are tailored to our principal market area atrates competitive to those offered in the area. In addition, we offer certain retirement account services, such asIndividual Retirement Accounts (IRAs). All deposit accounts are insured by the FDIC up to the maximum amountallowed by law (generally, $100,000 per depositor subject to aggregationrules).  We solicit these accounts fromindividuals, businesses, associations and organizations, and governmentalauthorities.

 

We also offer a full range of commercial andpersonal loans.  Commercial loans includeboth secured and unsecured loans for working capital (including inventory andreceivables), business expansion (including acquisition of real estate andimprovements), and purchase of equipment and machinery.  Consumer loans include secured and unsecuredloans for financing automobiles, home improvements, education, and personalinvestments.  We also make real estateconstruction and acquisition loans.  Weoriginate fixed and variable rate mortgage loans in the name of a third partywhich, are sold into the secondary market. Our lending activities are subject to a variety of lending limitsimposed by federal law.  While differinglimits apply in certain circumstances based on the type of loan or the natureof the borrower (including the borrower’s relationship to the bank), in generalwe are subject to a loan-to-one-borrower limit of an amount equal to 15% of thebank’s unimpaired capital and surplus, or 25% of the unimpaired capital andsurplus if the excess over 15% is approved by the board of directors of thebank and is fully secured by readily marketable collateral.  We may not make any loans to any director,officer, employee, or 10% shareholder of the company or the bank unless theloan is approved by our board of directors and is made on terms not morefavorable to such person than would be available to a person not affiliatedwith the bank.

 

Other bank services include internet banking, cashmanagement services, safe deposit boxes, travelers checks, direct deposit of payrolland social security checks, and automatic drafts for various accounts.  We offer non-deposit investment products andother investment brokerage services through a registered representative with anaffiliation through GAA Securities, Inc. We are associated with Jeannie, Star, and Plus networks of automatedteller machines and Mastermoney debit cards that may be used by our customersthroughout South Carolina and other regions. We also offer VISA and Mastercard credit card services through acorrespondent bank as our agent.

 

We currently do not exercise trust powers, but canbegin to do so with the prior approval of the OCC.

 

**Competition**

 

The banking business is highly competitive.  We compete as a financial intermediary withother commercial banks, savings and loan associations, credit unions and moneymarket mutual funds operating in the Columbia area and elsewhere.  As of June 30, 2004, there were 17 commercialbanks operating approximately 156 offices and two thrifts with a total of eightoffices in Lexington, Richland and Newberry Counties.  The competition among the various financialinstitutions is based upon a variety of factors, including interest ratesoffered on deposit accounts, interest rates charged on loans, credit andservice charges, the quality of services rendered, the convenience of bankingfacilities and, in the case of loans to large commercial borrowers, relativelending limits.  Size gives larger bankscertain advantages in competing for business from large corporations.  These advantages include higher lendinglimits and the ability to offers services in other areas of SouthCarolina.  As a result, we do notgenerally attempt to compete for the banking relationships of largecorporations, but concentrate our efforts on small- to medium-sized businessesand individuals.  We believe we havecompeted effectively in this market by offering quality and personal service.

 

**Employees**

 

Asof December 31, 2004, we had 106 full-time employees and 11 part-timeemployees. We believe that our relations with our employees are good.

 

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**SUPERVISIONAND REGULATION**

 

Boththe company and the bank are subject to extensive state and federal bankinglaws and regulations that impose specific requirements or restrictions on andprovide for general regulatory oversight of virtually all aspects of ouroperations.  These laws and regulationsare generally intended to protect depositors, not shareholders.  The following summary is qualified byreference to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations mayhave a material effect on our business and prospects.  Beginning with the enactment of the FinancialInstitutions Reform Recovery and Enforcement Act in 1989 and followed by theFDIC Improvement Act in 1991 and the Gramm-Leach-Bliley Act in 1999, numerousadditional regulatory requirements have been placed on the banking industry inthe past several years, and additional changes have been proposed.  Our operations may be affected by legislativechanges and the policies of various regulatory authorities.  We cannot predict the effect that fiscal ormonetary policies, economic control, or new federal or state legislation mayhave on our business and earnings in the future.

 

The followingdiscussion is not intended to be a complete list of all the activitiesregulated by the banking laws or of the impact of such laws and regulations onour operations.  It is intended only tobriefly summarize some material provisions.

 

**USA PATRIOT Act of 2002**

 

In October 2002, the USA PATRIOT Act of 2002 wasenacted in response to the terrorist attacks in New York, Pennsylvania, andWashington D.C. that occurred on September 11, 2001.  The PATRIOT Act is intended to strengthenU.S. law enforcement’s and the intelligence communities’ abilities to workcohesively to combat terrorism on a variety of fronts.  The potential impact of the PATRIOT Act onfinancial institutions is significant and wide ranging.  The PATRIOT Act contains sweeping anti-moneylaundering and financial transparency laws and imposes various regulations,including standards for verifying client identification at accountopening, and rules to promote cooperation among financial institutions,regulators, and law enforcement entities in identifying parties who may beinvolved in terrorism or money laundering.

 

**Check 21**

 

On October 28, 2003, President Bush signed into law the Check Clearingfor the 21st Century Act, also known as Check 21.  The new law, which is not effective untilOctober 28, 2004, gives “substitute checks,” such as a digital image of a checkand copies made from that image, the same legal standing as the original papercheck.  Some of the major provisionsinclude:

 

•                  allowingcheck truncation without making it mandatory;

•                  demandingthat every financial institution communicate to accountholders in writing adescription of its substitute check processing program and their rights underthe law;

•                  legalizingsubstitutions for and replacements of paper checks without agreement fromconsumers;

•                  retainingin place the previously mandated electronic collection and return of checksbetween financial institutions only when individual agreements are in place;

•                  requiringthat when accountholders request verification, financial institutions producethe original check (or a copy that accurately represents the original) anddemonstrate that the account debit was accurate and valid; and

•                  requiringrecrediting of funds to an individual’s account on the next business day aftera consumer proves that the financial institution has erred.

 

This new legislation will likely affect bank capital spending as manyfinancial institutions assess whether technological or operational changes arenecessary to stay competitive and take advantage of the new opportunitiespresented by Check 21.

 

**First Community Corporation**

 

We own 100% of the outstanding capital stock of the bank, and thereforewe are considered to be a bank holding company under the federal Bank HoldingCompany Act of 1956 and the South Carolina Banking and Branching EfficiencyAct.

 

*The Bank Holding Company Act.*  Under the Bank Holding Company Act, we aresubject to periodic examination by the Federal Reserve and are required to fileperiodic reports of our operations and any additional

 

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information that the Federal Reserve may require.  Our activities at the bank and holdingcompany levels are limited to:

 

•                  bankingand managing or controlling banks;

•                  furnishingservices to or performing services for our subsidiaries; and

•                  engagingin other activities that the Federal Reserve determines to be so closelyrelated to banking and managing or controlling banks as to be a proper incidentthereto.

 

*Investments, Control, and Activities.*  With certain limited exceptions, the BankHolding Company Act requires every bank holding company to obtain the priorapproval of the Federal Reserve before:

 

•                  acquiringsubstantially all the assets of any bank;

•                  acquiringdirect or indirect ownership or control of any voting shares of any bank ifafter the acquisition it would own or control more than 5% of the voting sharesof such bank (unless it already owns or controls the majority of such shares);or

•                  mergingor consolidating with another bank holding company.

 

In addition, and subject to certain exceptions, the Bank HoldingCompany Act and the Change in Bank Control Act, together with regulationspromulgated thereunder, require Federal Reserve approval prior to any person orcompany acquiring “control” of a bank holding company.  Control is conclusively presumed to exist ifan individual or company acquires 25% or more of any class of voting securitiesof a bank holding company.  Control isrebuttably presumed to exist if a person acquires 10% or more, but less than25%, of any class of voting securities and either the company has registeredsecurities under Section 12 of the Securities Exchange Act of 1934 or no otherperson owns a greater percentage of that class of voting securities immediatelyafter the transaction.  Our common stockis registered under the Securities Exchange Act of 1934.  The regulations provide a procedure forrebutting control when ownership of any class of voting securities is below25%.

 

Under the Bank Holding Company Act, a bank holding company is generallyprohibited from engaging in, or acquiring direct or indirect control of morethan 5% of the voting shares of any company engaged in, nonbanking activitiesunless the Federal Reserve Board, by order or regulation, has found thoseactivities to be so closely related to banking or managing or controlling banksas to be a proper incident thereto.  Someof the activities that the Federal Reserve Board has determined by regulationto be proper incidents to the business of a bank holding company include:

 

•                  makingor servicing loans and certain types of leases;

•                  engagingin certain insurance and discount brokerage activities;

•                  performingcertain data processing services;

•                  actingin certain circumstances as a fiduciary or investment or financial adviser;

•                  owningsavings associations; and

•                  makinginvestments in certain corporations or projects designed primarily to promotecommunity welfare.

 

The Federal Reserve Board imposes certain capital requirements on thecompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are described below under “-First Community Bank, N.A. - Capital Regulations.”  Subject to our capital requirements andcertain other restrictions, we are able to borrow money to make a capitalcontribution to the bank, and these loans may be repaid from dividends paidfrom the bank to the company.  Ourability to pay dividends will be subject to regulatory restrictions asdescribed below in “- First Community Bank, N.A. – Dividends.”  We are also able to raise capital forcontribution to the bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

 

*Source of Strength; Cross-Guarantee.*  In accordance with Federal Reserve Boardpolicy, we are expected to act as a source of financial strength to the bankand to commit resources to support the bank in circumstances in which we might nototherwise do so.  Under the Bank HoldingCompany Act, the Federal Reserve Board may require a bank holding company toterminate any activity or relinquish control of a nonbank subsidiary, otherthan a nonbank subsidiary of a bank, upon the Federal Reserve Board’sdetermination that such activity or control constitutes a serious risk to thefinancial soundness or stability of any depository institution subsidiary ofthe bank

 

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holding company.  Further, federalbank regulatory authorities have additional discretion to require a bankholding company to divest itself of any bank or nonbank subsidiaries if theagency determines that divestiture may aid the depository institution’sfinancial condition.

 

*The Gramm-Leach-Bliley Act.*  The Gramm-Leach-Bliley Act was signed intolaw on November 12, 1999.  Among otherthings, the Act repealed the restrictions on banks affiliating with securitiesfirms contained in sections 20 and 32 of the Glass-Steagall Act.  The Act also permits bank holding companiesthat become financial holding companies to engage in a statutorily providedlist of financial activities, including insurance and securities underwritingand agency activities, merchant banking, and insurance company portfolioinvestment activities.  The Act alsoauthorizes activities that are “complementary” to financial activities.  We have not elected to become a financialholding company.

 

The Act is intended, in part, to grant to community banks certainpowers as a matter of right that larger institutions have accumulated on an adhoc basis.  Nevertheless, the Act mayhave the result of increasing the amount of competition that we face fromlarger institutions and other types of companies.  In fact, it is not possible to predict thefull effect that the Act will have on us.

 

*South Carolina State Regulation.*As a South Carolina bank holding company under the South Carolina Banking andBranching Efficiency Act, we are subject to limitations on sale or merger andto regulation by the South Carolina Board of Financial Institutions.  We are not required to obtain the approval ofthe Board prior to acquiring the capital stock of a national bank, but we mustnotify them at least 15 days prior to doing so. We must receive the Board’s approval prior to engaging in theacquisition of a South Carolina state chartered bank or another South Carolinabank holding company.

 

**First Community Bank, N.A.**

 

The bank operates as a national banking association incorporated underthe laws of the United States and subject to examination by the Office of theComptroller of the Currency.  Deposits inthe bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) upto a maximum amount, which is generally $100,000 per depositor subject to theaggregation rule.

 

The Office of the Comptroller of the Currency and the FDIC regulate ormonitor virtually all areas of the bank’s operations, including

 

•                  securitydevices and procedures;

•                  adequacyof capitalization and loss reserves;

•                  loans;

•                  investments;

•                  borrowings;

•                  deposits;

•                  mergers;

•                  issuancesof securities;

•                  paymentof dividends;

•                  interestrates payable on deposits;

•                  interestrates or fees chargeable on loans;

•                  establishmentof branches;

•                  corporatereorganizations;

•                  maintenanceof books and records; and

•                  adequacyof staff training to carry on safe lending and deposit gathering practices.

 

The Office of the Comptroller of the Currency requires the bank tomaintain specified capital ratios and imposes limitations on the bank’s aggregateinvestment in real estate, bank premises, and furniture and fixtures.  The Office of the Comptroller of the Currencyalso requires the bank to prepare annual reports on the bank’s financialcondition and to conduct an annual audit of its financial affairs in compliancewith its minimum standards and procedures.

 

8

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Under the FDIC Improvement Act, all insured institutions must undergoregular on-site examinations by their appropriate banking agency.  The cost of examinations of insureddepository institutions and any affiliates may be assessed by the appropriateagency against each institution or affiliate as it deems necessary orappropriate.  Insured institutions arerequired to submit annual reports to the FDIC, their federal regulatory agency,and state supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop a method forinsured depository institutions to provide supplemental disclosure of theestimated fair market value of assets and liabilities, to the extent feasibleand practicable, in any balance sheet, financial statement, report of conditionor any other report of any insured depository institution.  The FDIC Improvement Act also requires thefederal banking regulatory agencies to prescribe, by regulation, standards forall insured depository institutions and depository institution holdingcompanies relating, among other things, to the following:

 

•                  internalcontrols;

•                  informationsystems and audit systems;

•                  loandocumentation;

•                  creditunderwriting;

•                  interestrate risk exposure; and

•                  assetquality.

 

National banks and their holding companies which have been chartered orregistered or have undergone a change in control within the past two years orwhich have been deemed by the Office of the Comptroller of the Currency or theFederal Reserve Board to be troubled institutions must give the Office of theComptroller of the Currency or the Federal Reserve Board 30 days prior noticeof the appointment of any senior executive officer or director.  Within the 30 day period, the Office of theComptroller of the Currency or the Federal Reserve Board, as the case may be,may approve or disapprove any such appointment.

 

*Deposit Insurance -*The FDIC establishes rates for the payment ofpremiums by federally insured commercial banks and savings banks, or thrifts,for deposit insurance. The FDIC maintains a separate Bank Insurance Fund forbanks and Savings Association Insurance Fund for savings banks and thrifts.  The FDIC has adopted a risk-based assessmentsystem for determining an insured depository institutions’ insurance assessmentrate.  The system takes into account therisks attributable to different categories and concentrations of assets andliabilities.  An institution is placedinto one of three capital categories: (1) well capitalized; (2) adequately capitalized; or (3)undercapitalized.  The FDIC also assignsan institution to one of three supervisory subgroups, based on the FDIC’sdetermination of the institution’s financial condition and the risk posed tothe deposit insurance funds.  Assessmentsrange from 0 to 27 cents per $100 of deposits, depending on the institution’scapital group and supervisory subgroup. In addition, the FDIC imposes assessments to help pay off the $780million in annual interest payments on the $8 billion Financing Corporationbonds issued in the late 1980s as part of the government rescue of the thriftindustry.  The FDIC assessment rate onour bank deposits currently is zero but may change in the future.  The FDIC may increase or decrease theassessment rate schedule on a semiannual basis. An increase in the BIF or SAIF assessment rate could have a materialadverse effect on our earnings, depending on the amount of the increase.

 

TheFDIC may terminate its insurance of deposits if it finds that the institutionhas engaged in unsafe and unsound practices, is in an unsafe or unsoundcondition to continue operations, or has violated any applicable law,regulation, rule, order, or condition imposed by the FDIC.

 

*Transactions with Affiliates and Insiders -*Thebank is subject to the provisions of Section 23A of the Federal Reserve Act,which places limits on the amount of loans or extensions of credit to, orinvestments in, or certain other transactions with, affiliates and on theamount of advances to third parties collateralized by the securities orobligations of affiliates.  The aggregateof all covered transactions is limited in amount, as to any one affiliate, to10% of the bank’s capital and surplus and, as to all affiliates combined, to20% of the bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each coveredtransaction must meet specified collateral requirements.  Compliance is also required with certainprovisions designed to avoid the taking of low quality assets.

 

9

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The bank also is subject to the provisions of Section 23B of theFederal Reserve Act which, among other things, prohibits an institution fromengaging in certain transactions with certain affiliates unless thetransactions are on terms substantially the same, or at least as favorable tosuch institution or its subsidiaries, as those prevailing at the time forcomparable transactions with nonaffiliated companies.  The bank is subject to certain restrictionson extensions of credit to executive officers, directors, certain principalshareholders, and their related interests. Such extensions of credit (i) must be made on substantially the sameterms, including interest rates and collateral, as those prevailing at the timefor comparable transactions with third parties and (ii) must not involve morethan the normal risk of repayment or present other unfavorable features.

 

The Federal Reserve Board has recently issued Regulation W, whichcodifies prior regulations under Sections 23A and 23B of the Federal ReserveAct and interpretative guidance with respect to affiliate transactions.  Regulation W incorporates the exemption fromthe affiliate transaction rules but expands the exemption to cover the purchaseof any type of loan or extension of credit from an affiliate.  In addition, under Regulation W:

 

•                  abank and its subsidiaries may not purchase a low-quality asset from anaffiliate;

•                  coveredtransactions and other specified transactions between a bank or itssubsidiaries and an affiliate must be on terms and conditions that areconsistent with safe and sound banking practices; and

•                  withsome exceptions, each loan or extension of credit by a bank to an affiliatemust be secured by collateral with a market value ranging from 100% to 130%,depending on the type of collateral, of the amount of the loan or extension ofcredit.

 

Regulation W generally excludes all non-bank and non-savingsassociation subsidiaries of banks from treatment as affiliates, except to theextent that the Federal Reserve Board decides to treat these subsidiaries asaffiliates.  Concurrently with theadoption of Regulation W, the Federal Reserve Board has proposed a regulationwhich would further limit the amount of loans that could be purchased by a bankfrom an affiliate to not more than 100% of the bank’s capital and surplus.  This regulation has not yet been adopted.

 

*Dividends -*Anational bank may not pay dividends from its capital.  All dividends must be paid out of undividedprofits then on hand, after deducting expenses, including reserves for lossesand bad debts.  In addition, a nationalbank is prohibited from declaring a dividend on its shares of common stockuntil its surplus equals its stated capital, unless there has been transferredto surplus no less than one-tenth of the bank’s net profits of the precedingtwo consecutive half-year periods (in the case of an annual dividend).  The approval of the Office of the Comptrollerof the Currency is required if the total of all dividends declared by anational bank in any calendar year exceeds the total of its net profits forthat year combined with its retained net profits for the preceding two years,less any required transfers to surplus.

 

*Branching -*Nationalbanks are required by the National Bank Act to adhere to branch office bankinglaws applicable to state banks in the states in which they are located.  Under current South Carolina law, the bankmay open branch offices throughout South Carolina with the prior approval ofthe Office of the Comptroller of the Currency. In addition, with prior regulatory approval, the bank is able to acquireexisting banking operations in South Carolina. Furthermore, federal legislation permits interstate branching, includingout-of-state acquisitions by bank holding companies, interstate branching bybanks if allowed by state law, and interstate merging by banks.  South Carolina law, with limited exceptions,currently permits branching across state lines through interstate mergers.

 

*Community Reinvestment Act -*TheCommunity Reinvestment Act requires that, in connection with examinations offinancial institutions within their respective jurisdictions, the FederalReserve, the FDIC, or the Office of the Comptroller of the Currency, shallevaluate the record of each financial institution in meeting the credit needsof its local community, including low and moderate income neighborhoods.  These factors are also considered inevaluating mergers, acquisitions, and applications to open a branch orfacility.  Failure to adequately meetthese criteria could impose additional requirements and limitations on ourbank.

 

10

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*The Gramm-Leach-Bliley Act -*Underthe Gramm-Leach-Bliley Act, subject to certain conditions imposed by theirrespective banking regulators, national and state-chartered banks are permittedto form “financial subsidiaries” that may conduct financial or incidentalactivities, thereby permitting bank subsidiaries to engage in certainactivities that previously were impermissible. The Gramm-Leach-Bliley Act imposes several safeguards and restrictionson financial subsidiaries, including that the parent bank’s equity investmentin the financial subsidiary be deducted from the bank’s assets and tangibleequity for purposes of calculating the bank’s capital adequacy.  In addition, the Gramm-Leach-Bliley Actimposes new restrictions on transactions between a bank and its financialsubsidiaries similar to restrictions applicable to transactions between banksand nonbank affiliates.

 

The Gramm-Leach-Bliley Act also contains provisions regarding consumerprivacy.  These provisions requirefinancial institutions to disclose their policy for collecting and protectingconfidential information.  Customersgenerally may prevent financial institutions from sharing personal financialinformation with nonaffiliated third parties except for third parties that marketan institution’s own products and services. Additionally, financial institutions generally may not disclose consumeraccount numbers to any nonaffiliated third party for use in telemarketing,direct mail marketing, or other marketing to the consumer.

 

*Other Regulations -*Interestand other charges collected or contracted for by the bank are subject to stateusury laws and federal laws concerning interest rates.  The bank’s loan operations are also subjectto federal laws applicable to credit transactions, such as:

 

•                  thefederal Truth-In-Lending Act, governing disclosures of credit terms to consumerborrowers;

•                  theHome Mortgage Disclosure Act of 1975, requiring financial institutions toprovide information to enable the public and public officials to determinewhether a financial institution is fulfilling its obligation to help meet thehousing needs of the community it serves;

•                  theEqual Credit Opportunity Act, prohibiting discrimination on the basis of race,creed or other prohibited factors in extending credit;

•                  theFair Credit Reporting Act of 1978, governing the use and provision ofinformation to credit reporting agencies;

•                  theFair Debt Collection Act, governing the manner in which consumer debts may becollected by collection agencies; and

•                  therules and regulations of the various federal agencies charged with theresponsibility of implementing such federal laws.

 

The deposit operations of the bank also are subject to:

 

•                  theRight to Financial Privacy Act, which imposes a duty to maintainconfidentiality of consumer financial records and prescribes procedures forcomplying with administrative subpoenas of financial records; and

•                  theElectronic Funds Transfer Act and Regulation E issued by the Federal ReserveBoard to implement that Act, which governs automatic deposits to and withdrawalsfrom deposit accounts and customers’ rights and liabilities arising from theuse of automated teller machines and other electronic banking services.

 

*Capital Regulations -*Thefederal bank regulatory authorities have adopted risk-based capital guidelinesfor banks and bank holding companies that are designed to make regulatorycapital requirements more sensitive to differences in risk profiles among banksand bank holding companies and account for off-balance sheet items.  The guidelines are minimums, and the federalregulators have noted that banks and bank holding companies contemplatingsignificant expansion programs should not allow expansion to diminish theircapital ratios and should maintain ratios in excess of the minimums.  We have not received any notice indicatingthat either First Community Corporation or First Community Bank, N.A. issubject to higher capital requirements. The current guidelines require all bank holding companies andfederally-regulated banks to maintain a minimum risk-based total capital ratioequal to 8%, of which at least 4% must be Tier 1 capital.  Tier 1 capital includes common shareholders’equity, qualifying perpetual preferred stock, and minority interests in equityaccounts of consolidated subsidiaries, but excludes goodwill and most otherintangibles and excludes the allowance for loan and lease losses.  Tier 2 capital includes the excess of anypreferred stock not included in Tier 1 capital, mandatory convertible securities,hybrid capital instruments, subordinated debt and intermediate term-preferredstock, and general reserves for loan and lease losses up to 1.25% ofrisk-weighted assets.

 

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Under these guidelines, banks’ and bank holding companies’ assets are givenrisk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet items are given credit conversionfactors to convert them to asset equivalent amounts to which an appropriaterisk-weight applies.  These computationsresult in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for firstmortgage loans fully secured by residential property and, under certaincircumstances, residential construction loans, both of which carry a 50%rating.  Most investment securities areassigned to the 20% category, except for municipal or state revenue bonds,which have a 50% rating, and direct obligations of or obligations guaranteed bythe United States Treasury or United States Government agencies, which have a 0%rating.

 

The federal bank regulatory authorities also have implemented aleverage ratio, which is equal to Tier 1 capital as a percentage of averagetotal assets less intangibles, to be used as a supplement to the risk-basedguidelines.  The principal objective ofthe leverage ratio is to place a constraint on the maximum degree to which abank holding company may leverage its equity capital base.  The minimum required leverage ratio fortop-rated institutions is 3%, but most institutions are required to maintain anadditional cushion of at least 100 to 200 basis points.

 

The FDIC Improvement Act established a new capital-based regulatoryscheme designed to promote early intervention for troubled banks, whichrequires the FDIC to choose the least expensive resolution of bankfailures.  The new capital-basedregulatory framework contains five categories of compliance with regulatorycapital requirements, including “well capitalized,” “adequately capitalized,” “undercapitalized,”“significantly undercapitalized,” and “critically undercapitalized.”  To qualify as a “well capitalized”institution, a bank must have a leverage ratio of no less than 5%, a Tier 1risk-based ratio of no less than 6%, and a total risk-based capital ratio of noless than 10%, and the bank must not be under any order or directive from theappropriate regulatory agency to meet and maintain a specific capitallevel.  Currently, we qualify as “wellcapitalized.”

 

Under the FDIC Improvement Act regulations, the applicable agency cantreat an institution as if it were in the next lower category if the agencydetermines (after notice and an opportunity for hearing) that the institutionis in an unsafe or unsound condition or is engaging in an unsafe or unsoundpractice.  The degree of regulatory scrutinyof a financial institution increases, and the permissible activities of theinstitution decrease, as it moves downward through the capital categories.  Institutions that fall into one of the threeundercapitalized categories may be required to do some or all of the following:

 

•                  submita capital restoration plan;

•                  raiseadditional capital;

•                  restricttheir growth, deposit interest rates, and other activities;

•                  improvetheir management;

•                  eliminatemanagement fees; or

•                  divestthemselves of all or a part of their operations.

 

These capital guidelines can affect us in several ways.  If we grow at a rapid pace, our capital maybe depleted too quickly, and a capital infusion from our holding company may benecessary which could impact our ability to pay dividends.  Our capital levels currently are adequate;however, rapid growth, poor loan portfolio performance, poor earningsperformance, or a combination of these factors could change our capitalposition in a relatively short period of time. If we fail to meet these capital requirements, our bank would berequired to develop and file a plan with the Office of the Comptroller of theCurrency describing the means and a schedule for achieving the minimum capitalrequirements.  In addition, our bankwould generally not receive regulatory approval of any application thatrequires the consideration of capital adequacy, such as a branch or mergerapplication, unless our bank could demonstrate a reasonable plan to meet thecapital requirement within a reasonable period of time.  A bank that is not “well capitalized” is alsosubject to certain limitations relating to so-called “brokered” deposits.  Bank holding companies controlling financialinstitutions can be called upon to boost the institutions’ capital and topartially guarantee the institutions’ performance under their capitalrestoration plans.

 

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*Enforcement Powers -*TheFinancial Institutions Reform Recovery and Enforcement Act expanded andincreased civil and criminal penalties available for use by the federalregulatory agencies against depository institutions and certain “institution-affiliatedparties.”  Institution-affiliated partiesprimarily include management, employees, and agents of a financial institution,as well as independent contractors and consultants such as attorneys andaccountants and others who participate in the conduct of the financialinstitution’s affairs.  These practicescan include the failure of an institution to timely file required reports orthe filing of false or misleading information or the submission of inaccuratereports.  Civil penalties may be as highas $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have beenincreased to twenty years.  In addition,regulators are provided with greater flexibility to commence enforcementactions against institutions and institution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orderswere expanded.  Such orders may, amongother things, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnifications orguarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe ordering agency to be appropriate.

 

*Effect of Governmental Monetary Policies -*Ourearnings are affected by domestic economic conditions and the monetary andfiscal policies of the United States government and its agencies.  The Federal Reserve Bank’s monetary policieshave had, and are likely to continue to have, an important impact on theoperating results of commercial banks through its power to implement nationalmonetary policy in order, among other things, to curb inflation or combat arecession.  The monetary policies of theFederal Reserve Board have major effects upon the levels of bank loans,investments and deposits through its open market operations in United Statesgovernment securities and through its regulation of the discount rate onborrowings of member banks and the reserve requirements against member bankdeposits.  It is not possible to predictthe nature or impact of future changes in monetary and fiscal policies.

 

*Proposed Legislation and Regulatory Action.*  Newregulations and statutes are regularly proposed that contain wide-rangingproposals for altering the structures, regulations, and competitiverelationships of the nation’s financial institutions.  We cannot predict whether or in what form anyproposed regulation or statute will be adopted or the extent to which ourbusiness may be affected by any new regulation or statute.

 

**Item 2.Description of Property.**

 

*Lexington Property*. The principal place of business of both thecompany and our main office is located at 5455 Sunset Boulevard, Lexington,South Carolina 29072.  The site of thebank’s main office is a 2.29 acre plot of land. The site was purchased for $576,000. We are operating in an 8,500 square foot facility located on this site.  In October 2000, the bank acquired anadditional 2.0 acres adjacent to the existing facility for approximately$300,000 for future expansion.  This siteis designed to allow for 24,000 to 48,000 square foot facility at some futuredate..

 

*Forest Acres Property*. We operate a branch office facility at 4404Forest Drive, Columbia, South Carolina 29206. The Forest Acres site is .71 acres. The banking facility is approximately 4,000 square feet with a totalcost of land and facility approximately $920,000.

 

*Irmo Property*. We operate a branch office facility at 1030Lake Murray Boulevard, Irmo, South Carolina 29063.  The Irmo site is approximately 1.00acre.  The banking facility isapproximately 3,200 square feet with a total cost of land and facility ofapproximately $1.1 million.

 

*Cayce/West Columbia Property*. We operate a branch office facility at 506Meeting Street, West Columbia, South Carolina, 29169.  The Cayce/West Columbia site is approximately1.25 acres.  The banking facility isapproximately 3,800 square feet with a total cost of land and facility ofapproximately $935,000.

 

*Gilbert Property.*We operate a branch office at 4325 AugustaHighway Gilbert, South Carolina 29054. The facility is an approximate 3000 square foot facility located on anapproximate one acre lot.  The total costof the land and facility was approximately $768,000.

 

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*Chapin Office.*We operate a branch office facility at 137 AmicksFerry Rd., Chapin, South Carolina 29036. The facility is approximately 2,200square feet and is located on a three acre lot. The total cost of the facility and land was approximately $695,000.

 

*Northeast Columbia.* We operate a branch office facility**at 9822 Two Notch Rd, Columbia, SouthCarolina 29223.* *The facility is approximately 3,000 square feet and is located on a 1.0acre lot.  The total cost of the facilityand land was approximately $1.2 million.

 

*College Street.*Weoperate a branch office at 1323 College Street, Newberry, South Carolina29108.  This banking office was acquiredin connection with the DutchFork merger. The banking facility is approximately 3,500 square feet and is locatedon a .65 acre lot.  The facility and land are valued atapproximately $365,000.

 

*Prosperity Property*.  We operate a branch office at 101 N. WheelerAvenue, Prosperity, South Carolina 29127. This office was acquired in connection with the DutchFork merger.  The banking facility is approximately 1,300square feet and is located on a .31 acre lot. The facility and land are valuedat approximately $175,000.

 

*Wilson Road. *We operate a branchoffice at 1735 Wilson Road, Newberry, South Carolina 29108.  The banking office was acquired in connectionwith the DutchFork merger.  This bankingfacility is approximately square feet and is located on a 1.56 acre lot.  Adjacent to the branch facility is a 13,000square foot facility which was formerly utilized as the DutchFork operationscenter.  The land and buildings arevalued at approximately $3.3 million.

 

*Redbank Property.*Weoperate a branch office facility at 1449 Two Notch Road, Lexington, SouthCarolina 29073.  This branch opened foroperation on February 3, 2005.  Thefacility is approximately 3,000 square feet and is located on a 1.0 acrelot.  The total cost of the facility andland was approximately $1.3 million.

 

*Highway 219Property. *A .61 acre lotlocated on highway 219 in Newberry County was acquired in connection with theDutchFork merger.  This lot may be usedfor a future branch location but no definitive plans have been made.  The lot is valued at $430,000.

 

**Item 3.Legal Proceedings.**

 

Neither the company nor the bank is a party to, noris any of their property the subject of, any material pending legal proceedingsrelated to the business of the company or the bank.

 

**Item 4. Submission of Matters to a Vote of Security Holders.**

 

No matter was submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this report.

 

**PART II**

**Item 5. Market for Common Equity and Related Stockholder Matters.**

 

Asof March 15, 2005, there were approximately 1,192 shareholders of record of ourcommon stock.  On January 15, 2003, ourstock began trading on the Nasdaq SmallCap Market under the trading symbol of “FCCO.”  Prior to January 15, 2003, our stock wasquoted on the OTC Bulletin Board under the trading symbol “FCCO.OB.”  The following table sets forth the high andlow sales price information as reported by Nasdaq in 2004 and 2003, and thedividends per share declared on our common stock in each such quarter.  All information has been adjusted for any stocksplits and stock dividends effected during the periods presented.

 
| ** **                       | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|----------------------------------|------------|----------|------------|---------|------------|---------------|------------|
|                             |       |     |       |    |       |          |       |
| **2003**                         |       |     |       |    |       |          |       |
| Quarter ended March 31, 2003     |       | $        | 17.00      |    | $          | 14.00         |       | $ | 0.04 |   |
| Quarter ended June 30, 2003      |       | $        | 19.47      |    | $          | 16.35         |       | $ | 0.05 |   |
| Quarter ended September 30, 2003 |       | $        | 20.16      |    | $          | 18.30         |       | $ | 0.05 |   |
| Quarter ended December 31, 2003  |       | $        | 22.30      |    | $          | 19.60         |       | $ | 0.05 |   |
| **2004**                         |       |     |       |    |       |          |       |
| Quarter ended March 31, 2004     |       | $        | 24.50      |    | $          | 21.75         |       | $ | 0.05 |   |
| Quarter ended June 30, 2004      |       | $        | 24.00      |    | $          | 20.50         |       | $ | 0.05 |   |
| Quarter ended September 30, 2004 |       | $        | 22.97      |    | $          | 20.00         |       | $ | 0.05 |   |
| Quarter ended December 31, 2004  |       | $        | 20.70      |    | $          | 18.30         |       | $ | 0.05 |   |

 

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Weexpect comparable dividends to be paid to the shareholders for the foreseeablefuture.  Notwithstanding the foregoing, thefuture dividend policy of the company is subject to the discretion of the boardof directors and will depend upon a number of factors, including futureearnings, financial condition, cash requirements, and general businessconditions.  As a national bank, our bankmay only pay dividends out of its net profits then on hand, after deductingexpenses, including losses and bad debts. In addition, the bank is prohibited from declaring a dividend on itsshares of common stock until its surplus equals its stated capital, unlessthere has been transferred to surplus no less than one-tenth of the bank’s netprofits of the preceding two consecutive half-year periods (in the case of anannual dividend).  The approval of theOCC will be required if the total of all dividends declared in any calendaryear by the bank exceeds the bank’s net profits to date, as defined, for thatyear combined with its retained net profits for the preceding two years lessany required transfers to surplus.  AtDecember 31, 2004, the bank had $5.1 million free of these restrictions.  The OCC also has the authority under federallaw to enjoin a national bank from engaging in what in its opinion constitutesan unsafe or unsound practice in conducting its business, including the paymentof a dividend under certain circumstances.

 

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**Item 6.  Management’s Discussionand Analysis.**

 

**First Community Corporation**

**SelectedFinancial Data**

 

(Amounts in thousands, except per share data)

 
| ** **                                           | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                 |       |                        |       |   |   |   |   |   |   |   |   |
| **Operations Statement Data:**                       |       |                        |       |   |   |   |   |   |   |   |   |
| Net interest income                                  |       | $                           | 9,596      |   | $ | 7,648 |   | $ | 7,044 |   | $ | 5,523 |   | $ | 4,376 |   |
| Provision for loan losses                            |       | 245                         |       | 167 |   | 677 |   | 407 |   | 161 |   |
| Non-interest income                                  |       | 1,774                       |       | 1,440 |   | 1,232 |   | 938 |   | 594 |   |
| Non-interest expense                                 |       | 7,977                       |       | 6,158 |   | 5,377 |   | 4,381 |   | 3,306 |   |
| Income taxes                                         |       | 963                         |       | 965 |   | 758 |   | 569 |   | 519 |   |
| Net income                                           |       | $                           | 2,185      |   | $ | 1,797 |   | $ | 1,464 |   | $ | 1,104 |   | $ | 984 |   |
| **Per Share Data:**                                  |       |                        |       |   |   |   |   |   |   |   |   |
| Net income diluted (1)                               |       | $                           | 1.09       |   | $ | 1.08 |   | $ | 0.90 |   | $ | 0.68 |   | $ | 0.61 |   |
| Cash dividends                                       |       | .20                         |       | 0.19 |   | 0.12 |   | — |   | — |   |
| Book value at period end (1)                         |       | 18.09                       |       | 12.21 |   | 11.61 |   | 10.56 |   | 9.70 |   |
| Tangible book value at period end (1)                |       | 8.19                        |       | 11.74 |   | 11.02 |   | 9.85 |   | 9.70 |   |
| **Balance Sheet Data:**                              |       |                        |       |   |   |   |   |   |   |   |   |
| Total assets                                         |       | $                           | 455,706    |   | $ | 215,029 |   | $ | 195,201 |   | $ | 156,555 |   | $ | 111,986 |   |
| Loans, net                                           |       | 184,007                     |       | 119,304 |   | 98,466 |   | 86,518 |   | 67,110 |   |
| Securities                                           |       | 196,026                     |       | 58,954 |   | 69,785 |   | 46,366 |   | 28,735 |   |
| Deposits                                             |       | 337,064                     |       | 185,259 |   | 168,062 |   | 134,402 |   | 92,755 |   |
| Shareholders’ equity                            |       | 50,463                      |       | 19,509 |   | 18,439 |   | 16,776 |   | 15,369 |   |
| Average shares outstanding (1)                       |       | 1,903                       |       | 1,590 |   | 1,588 |   | 1,585 |   | 1,584 |   |
| **Performance Ratios:**                              |       |                        |       |   |   |   |   |   |   |   |   |
| Return on average assets                             |       | 0.76                        | %          | 0.88 | % | 0.82 | % | 0.77 | % | 0.94 | % |
| Return on average equity                             |       | 8.00                        | %          | 9.49 | % | 8.35 | % | 8.00 | % | 6.76 | % |
| Net interest margin                                  |       | 3.72                        | %          | 4.02 | % | 4.26 | % | 4.19 | % | 4.59 | % |
| Dividend payout ratio                                |       | 17.39                       | %          | 16.81 | % | 13.04 | % | N/A |   | N/A |   |
| **Asset Quality Ratios:**                            |       |                        |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to period end  total loans |       | 1.48                        | %          | 1.41 | % | 1.53 | % | 1.14 | % | 1.30 | % |
| Allowance for loan losses to non-performing  assets  |       | 2291.34                     | %          | 2,123.60 | % | 1,059.24 | % | 247.00 | % | N/A |   |
| Non-performing assets to total assets                |       | .03                         | %          | .04 | % | .07 | % | 0.26 | % | N/A |   |
| Net charge-offs (recoveries) to average  loans       |       | .13                         | %          | (.01 | )% | .16 | % | 0.35 | % | 0.08 | % |
| **Capital and Liquidity Ratios:**                    |       |                        |       |   |   |   |   |   |   |   |   |
| Tier 1 risk-based capital                            |       | 12.91                       | %          | 13.21 | % | 14.03 | % | 14.90 | % | 19.30 | % |
| Total risk-based capital                             |       | 13.86                       | %          | 14.42 | % | 15.28 | % | 15.90 | % | 20.40 | % |
| Leverage ratio                                       |       | 8.51                        | %          | 8.87 | % | 8.77 | % | 10.00 | % | 13.80 | % |
| Equity to assets ratio                               |       | 9.60                        | %          | 9.07 | % | 9.45 | % | 10.72 | % | 13.72 | % |
| Average loans to average deposits                    |       | 61.00                       | %          | 63.33 | % | 60.71 | % | 68.66 | % | 67.14 | % |
|                                                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  Adjusted for the June 30, 2001 5% stockdividend and the February 28, 2002 5-for-4 stock split.

 

16

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Overview

 

First Community Corporation is a one bankholding company.  The company commencedoperations on November 2, 1994.  Thebank, the company’s only subsidiary began operations on August 17, 1995 fromits first office located in Lexington, South Carolina.  On September 14, 1995 the company opened itssecond office located in Forest Acres, South Carolina.  The bank now has 11offices, after opening ade-novo branch in the Redbank community of Lexington County in February 2005.All of the offices are located in Lexington County, Newberry County or RichlandCounty, South Carolina.  During thefourth quarter of 2004, the company completed its first acquisition of anotherfinancial institution when it merged with DutchFork Bancshares, Inc. theholding company for Newberry Federal Savings Bank.  The merger added three offices in NewberryCounty, which is located in the Midlands of South Carolina.  The company engages in a general commercialand retail banking business characterized by personalized service and localdecision making, emphasizing the banking needs of small to medium-sizedbusinesses, professional concerns and individuals.

 

During 2004, the company experiencedsignificant growth through the merger with DutchFork Bancshares whilecontinuing to experience organic loan and deposit growth in the markets servedprior to the acquisition.  When referringto “organic growth,” the measure excludes the amounts acquired as of the dateof the merger.  The company experienced “organicloan growth” during 2004 of approximately 12.1% or $14.6 million.  This growth was funded by organic depositgrowth of approximately 9.2% or $17.0 million in 2004.  Total assets grew to $455.7 million, loans to$186.8 million and deposits to $337.1 million at December 31, 2004.

 

The company’s net income increased$388,000 in 2004, or 21.6%, over the year ended December 31, 2003.  Net income was $2.2 million, or $1.09 dilutedearnings per share in 2004, compared to $1.8 million or $1.08 diluted earningsper share in 2003.

 

Thefollowing discussion describes our results of operations for 2004 as comparedto 2003 (and 2003 compared to 2002) and also analyzes our financial conditionas of December 31, 2004 as compared to December 31, 2003.  Like most community banks, we derive most ofour income from interest we receive on our loans and investments.  A primary source of funds for making theseloans and investments is our deposits, on which we pay interest.  Consequently, one of the key measures of oursuccess is our amount of net interest income, or the difference between theincome on our interest-earning assets, such as loans and investments, and theexpense on our interest-bearing liabilities, such as deposits.  Another key measure is the spread between theyield we earn on these interest-earning assets and the rate we pay on ourinterest-bearing liabilities.

 

Wehave included a number of tables to assist in our description of thesemeasures.  For example, the “AverageBalances” table shows the average balance during 2004, 2003 and 2002 of eachcategory of our assets and liabilities, as well as the yield we earned or therate we paid with respect to each category. A review of this table shows that our loans typically provide higherinterest yields than do other types of interest earning assets, which is why weintend to channel a substantial percentage of our earning assets into our loanportfolio.  Similarly, the “Rate/VolumeAnalysis” table helps demonstrate the impact of changing interest rates andchanging volume of assets and liabilities during the years shown.  We also track the sensitivity of our variouscategories of assets and liabilities to changes in interest rates, and we haveincluded a “Sensitivity Analysis Table” to help explain this.  Finally, we have included a number of tablesthat provide detail about our investment securities, our loans, and ourdeposits and other borrowings.

 

Thereare risks inherent in all loans, so we maintain an allowance for loan losses toabsorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance bycharging a provision for loan losses against our operating earnings.  In the following section we have included adetailed discussion of this process, as well as several tables describing ourallowance for loan losses and the allocation of this allowance among ourvarious categories of loans.

 

Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other expenses we charge to our customers.  We describe the various components of thisnoninterest income, as well as our noninterest expense, in the followingdiscussion. The discussion and analysis also identifies significant factorsthat have affected our financial position and operating results during theperiods included in the accompanying financial statements.  We encourage you to read this discussion andanalysis in conjunction with the financial statements and the related notes andthe other statistical information also included in this report.

 

17

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MergerCompleted During 2004.

 

On April 12, 2004, the company enteredinto an Agreement and Plan of Merger with DutchFork Bancshares, Inc, whichprovided for the merger of DutchFork with and into the company. In addition,the agreement provided for the merger of Newberry Federal Savings Bank, asubsidiary of DutchFork, with and into First Community Bank, N.A.  The merger was completed on October 1, 2004.  Pursuant to the merger the company issued1,169,898 shares of common stock valued at $27.3 million and paid $18.3 millionin cash to former shareholders of DutchFork. Other costs related to the merger included stock options valued at $2.6million and direct acquisition cost of $1.1 million.  The fair value of assets acquired at the dateof acquisition was $224.2 million, including $24.2 million in goodwill and $2.9million in core deposit intangible.  Thefair value of liabilities assumed amounted to $174.9 million.

 

Results of Operations

 

The company’s net income was $2.2million, or $1.09 diluted earnings per share, for the year ended December 31,2004, as compared to net income of $1.8 million, or $1.08 diluted earnings pershare, for the year ended December 31, 2003, and $1.5 million, or $0.90 dilutedearnings per share, for the year ended December 31, 2002. Net interest income,non-interest income and non-interest expense increased as a result of theorganic growth the company has experienced throughout the year. Our results ofoperations also include the impact of the merger with DutchFork in October2004.  The increase in net income for2004 as compared to 2003 resulted primarily from an increase in the level ofaverage earning assets of $67.6 million. The effects of the increase in earning assets was somewhat offset by adecrease in the net interest margin from 4.02% in 2003 as compared to 3.72%during 2004.  Net interest spread, thedifference between the yield on earning assets and the rate paid oninterest-bearing liabilities, was 3.46% in 2004 as compared to 3.71% in 2003and 3.91% in 2002.  Net interest incomeincreased from $7.6 million in 2003 to $9.6 million in the year ended December31, 2004.  The provision for loan losseswas $245,000 in 2004 as compared to $167,000 in 2003.  Non-interest income increased from $1.4million in 2003 to $1.8 million in 2004 due primarily to increased depositservice charges resulting from higher average deposit account balances as wellas increased ATM/debit card fees and ATM surcharge fees.  Non-interest expense increased to $8.0million in 2004 as compared to $6.2 million in 2003.  This increase is attributable to increases inall expense categories required to support the continued growth of the bank.

 

The increase in net income from 2002 to 2003resulted primarily from an increase in the level of average earning assets of$24.8 million, and a decrease in the provision for loan losses from $677,000 in2002 to $167,000 in 2003.  These factorswere somewhat offset by a 24 basis point decrease in the net interest marginEarning assets averaged $190.3 million in 2003 as compared to $165.5 million in2002. The lower provision for loan losses was a result of the company realizinga substantial recovery on a loan charged off in a previous period andsubsequently recovered in 2003. Non-interest income increased from $1.2 millionin 2002 to $1.4 million in 2003 due to increased deposit service charges andincreases in mortgage origination fees. Non-interest expense increased to $6.2 million in 2003 as compared to$5.4 million in 2002.  This increase isattributable to increases in all expense categories required to supportthe continued growth of the bank.

 

Net Interest Income

 

Net interest income is the company’s primarysource of revenue.  Net interest incomeis the difference between income earned on assets and interest paid on depositsand borrowings used to support such assets. Net interest income is determined by the rates earned on the company’sinterest-earning assets and the rates paid on its interest-bearing liabilities,the relative amounts of interest-earning assets and interest-bearingliabilities, and the degree of mismatch and the maturity and repricingcharacteristics of its interest-earning assets and interest-bearingliabilities.

 

Net interest income totaled $9.6 millionin 2004, $7.6 million in 2003 and $7.0 million in 2002.  In 2004, loans represented 55.0% of averageearning assets as compared to 58.8% in 2003. As a result of the acquisition of DutchFork, the company’s loan todeposit ratio decreased on average during 2004 and at December 31, 2004 was at55.4%.  Loans typically provide a higheryield than other types of earning assets and thus one of the company’s goalscontinues to be to grow the loan portfolio as a percentage of earningassets.  The yield on earning assetsdecreased from 5.95% in 2002 to 5.27% in 2003 and 5.06% in 2004.  For several years the economy has experiencedhistorically low market interest rates which have contributed to the continueddecline in the yield on earning assets. The decrease in yield on average earning assets was partially offset bya decrease in the rate paid on

 

18

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interest-bearing liabilities to 1.56% in 2003from 2.04% in 2002.  In 2004, the ratepaid on interest-bearing liabilities increased slightly to 1.60%.  This increase resulted from an increase inaverage borrowings from $7.9 million in 2003 to $24.6 million in 2004.  The company borrowed $15.0 million inlong-term debt to facilitate the merger with DutchFork and acquired $35.0million in Federal Home Loan Bank advances as a result of the merger.  These longer term borrowed funds typicallyhave a higher interest rate then the company’s mix of deposit products.  The company experienced a decrease in therate paid on interest-bearing deposits from 1.60% in 2003 to 1.43% in 2004.

 

A*verageBalances, Income Expenses and Rates*. The following tables depict, for the periods indicated, certaininformation related to the company’s average balance sheet and its averageyields on assets and average costs of liabilities.  Such yields are derived by dividing income orexpense by the average balance of the corresponding assets or liabilities. Averagebalances have been derived from daily averages.

 

(In thousands)

 
| ** **                                       | ** ** | **Year  ended December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **Average  Balance**         | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** |
| **Assets**                                       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earning assets                                   |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                            |       | $                            | 141,793    |   | $ | 9,063 |   | 6.39 | % | $ | 111,928 |   | $ | 7,582 |   | 6.77 | % | $ | 93,992 |   | $ | 7,025 |   | 7.47 | % |
| Securities                                       |       | 92,933                       |       | 3,647 |   | 3.92 | % | 60,261 |   | 2,267 |   | 3.76 | % | 58,462 |   | 2,614 |   | 4.47 | % |
| Other short-term  investments (2)                |       | 23,167                       |       | 334 |   | 1.44 | % | 18,089 |   | 179 |   | 0.99 | % | 13,074 |   | 208 |   | 1.59 | % |
| Total earning  assets                            |       | 257,893                      |       | 13,044 |   | 5.06 | % | 190,278 |   | 10,028 |   | 5.27 | % | 165,528 |   | 9,847 |   | 5.95 | % |
| Cash and due from  banks                         |       | 8,425                        |       |   |   |   |   | 6,626 |   |   |   |   |   | 5,359 |   |   |   |   |   |
| Premises and  equipment                          |       | 9,740                        |       |   |   |   |   | 7,440 |   |   |   |   |   | 6,644 |   |   |   |   |   |
| Other assets                                     |       | 12,173                       |       |   |   |   |   | 2,195 |   |   |   |   |   | 2,362 |   |   |   |   |   |
| Allowance for  loan losses                       |       | (2,063                       | )          |   |   |   |   | (1,744 | ) |   |   |   |   | (1,245 | ) |   |   |   |   |
| Total assets                                     |       | $                            | 286,168    |   |   |   |   |   | $ | 204,795 |   |   |   |   |   | $ | 178,648 |   |   |   |   |   |
| **Liabilities**                                  |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  transaction accounts           |       | $                            | 36,906     |   | 110 |   | 0.30 | % | $ | 31,892 |   | 66 |   | 0.21 | % | $ | 27,509 |   | 80 |   | 0.29 | % |
| Money market  accounts                           |       | 29,568                       |       | 284 |   | 0.96 | % | 25,122 |   | 231 |   | 0.92 | % | 27,848 |   | 413 |   | 1.48 | % |
| Savings deposits                                 |       | 22,070                       |       | 155 |   | 0.70 | % | 12,041 |   | 84 |   | 0.70 | % | 8,917 |   | 82 |   | 0.92 | % |
| Time deposits                                    |       | 102,322                      |       | 2,180 |   | 2.13 | % | 75,391 |   | 1,927 |   | 2.56 | % | 67,500 |   | 2,185 |   | 3.24 | % |
| Other borrowings                                 |       | 24,596                       |       | 719 |   | 2.92 | % | 7,855 |   | 72 |   | 0.92 | % | 5,305 |   | 43 |   | 0.81 | % |
| Total  interest-bearing liabilities              |       | 215,462                      |       | 3,448 |   | 1.60 | % | 152,301 |   | 2,380 |   | 1.56 | % | 137,079 |   | 2,803 |   | 2.04 | % |
| Demand deposits                                  |       | 41,663                       |       |   |   |   |   | 32,304 |   |   |   |   |   | 23,045 |   |   |   |   |   |
| Other liabilities                                |       | 1,573                        |       |   |   |   |   | 1,243 |   |   |   |   |   | 983 |   |   |   |   |   |
| Shareholders’  equity                       |       | 27,470                       |       |   |   |   |   | 18,947 |   |   |   |   |   | 17,541 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity |       | $                            | 286,168    |   |   |   |   |   | $ | 204,795 |   |   |   |   |   | $ | 178,648 |   |   |   |   |   |
| Net interest  spread                             |       |                         |       |   |   | 3.46 | % |   |   |   |   | 3.71 | % |   |   |   |   | 3.91 | % |
| Net interest income/margin                       |       |                         |       | $ | 9,596 |   | 3.72 | % |   |   | $ | 7,648 |   | 4.02 | % |   |   | $ | 7,044 |   | 4.29 | % |

 

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(1)                                  All loans and deposits are domestic. Averageloan balance includes non-accrual loans.

(2)                                  The computation includes federal funds sold,securities purchased under agreement to resell and interest bearing deposits.

 

19

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Thefollowing table presents the dollar amount of changes in interest income andinterest expense attributable to changes in volume and the amount attributableto changes in rate.  The combined effectin both volume and rate, which cannot be separately identified has beenallocated proportionately to the change due to volume and due to rate.

 

(Inthousands)

 
| ** **                            | ** ** | **2004 versus 2003**           | ** ** | **2003 versus 2002**           | ** ** |
|---------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **Increase (decrease) due to** | ** ** | **Increase (decrease) due to** | ** ** |
| ** **                            | ** ** | **Volume**                     | ** ** | **Rate**                       | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| ** **                            | ** ** | ** **                     | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                            |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Earning assets                        |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Loans                                 |       | $                              | 1,929      |                           | $          | (448 | ) | $ | 1,481 |   | $ | 1,256 |   | $ | (700 | ) | $ | 556 |   |
| Investment securities                 |       | 1,287                          |       | 93                             |       | 1,380 |   | 78 |   | (425 | ) | (347 | ) |
| Other short-term investments (1)      |       | 14                             |       | 141                            |       | 155 |   | 64 |   | (92 | ) | (28 | ) |
| Total earning assets                  |       | 3,435                          |       | (419                           | )          | 3,016 |   | 1,377 |   | (1,196 | ) | 181 |   |
|                                  |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities          |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing transaction accounts |       | 8                              |       | 36                             |       | 44 |   | (11 | ) | 25 |   | (14 | ) |
| Money market accounts                 |       | 42                             |       | 11                             |       | 53 |   | (37 | ) | (144 | ) | (181 | ) |
| Savings deposits                      |       | 71                             |       | 1                              |       | 72 |   | 25 |   | (23 | ) | 2 |   |
| Time deposits                         |       | 610                            |       | (357                           | )          | 253 |   | 236 |   | (495 | ) | (259 | ) |
| Other short term borrowings           |       | 321                            |       | 325                            |       | 646 |   | 23 |   | 7 |   | 30 |   |
| Total interest-bearing liabilities    |       | 1,013                          |       | 55                             |       | 1,068 |   | 288 |   | (710 | ) | (422 | ) |
| Net interest income                   |       |                           |       |                           |       | $ | 1,948 |   |   |   |   |   | $ | 603 |   |
|                                       |            |                                |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Interest Sensitivity*.  The company monitors and manages the pricingand maturity of its assets and liabilities in order to diminish the potentialadverse impact that changes in interest rates could have on its net interestincome. A monitoring technique employed by the company is the measurement ofthe company’s interest sensitivity “gap,” which is the positive or negativedollar difference between assets and liabilities that are subject to interestrate repricing within a given period of time. Also, asset/liability modeling is performed by the company to assess theimpact varying interest rates and balance sheet mix assumptions will have onnet interest income.  Interest ratesensitivity can be managed by repricing assets or liabilities, sellingsecurities available-for-sale, replacing an asset or liability at maturity orby adjusting the interest rate during the life of an asset or liability.  Managing the amount of assets and liabilitiesrepricing in the same time interval helps to hedge the risk and minimize theimpact on net interest income of rising or falling interest rates.  The company evaluates interest sensitivityrisk and then formulates guidelines regarding asset generation and repricing,funding sources and pricing, and off-balance sheet commitments in order todecrease interest sensitivity risk. Neither the “gap” analysis or asset/liability modeling are preciseindicators of the interest sensitivity position of the company due to the manyfactors that affect net interest income including changes in the volume and mixof earning assets and interest-bearing liabilities.

 

20

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The following tableillustrates the company’s interest rate sensitivity at December 31, 2004.

 

*Interest SensitivityAnalysis*

*(In thousands)*

 
| ** **                                                                                     | ** ** | **Within  One Year** | ** ** | **One to  Three Years** | ** ** | **Three to  Five Years** | ** ** | **Over  Five Years** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------------|------------|--------------------------|------------|----------------------|------------|-----------|------------|
| Assets                                                                                         |       |                 |       |                    |       |                     |       |                 |       |      |       |
| Earning  assets                                                                                |       |                 |       |                    |       |                     |       |                 |       |      |       |
| Loans (1)                                                                                      |       | $                    | 109,195    |                    | $          | 40,856                   |       | $                    | 34,256     |      | $          | 2,464 |   | $ | 186,771 |   |
| Securities  (2)                                                                                |       | 51,213               |       | 54,214                  |       | 58,403                   |       | 33,536               |       | 197,366   |       |
| Federal  funds sold, securities purchased under agreements to resell and other earning  assets |       | 9,934                |       | —                  |       | —                   |       | —               |       | 9,934     |       |
| Total  earning assets                                                                          |       | 170,342              |       | 95,070                  |       | 92,659                   |       | 36,000               |       | 394,071   |       |
|                                                                                           |       |                 |       |                    |       |                     |       |                 |       |      |       |
| Liabilities                                                                                    |       |                 |       |                    |       |                     |       |                 |       |      |       |
| Interest  bearing liabilities                                                                  |       |                 |       |                    |       |                     |       |                 |       |      |       |
| Interest  bearing deposits                                                                     |       |                 |       |                    |       |                     |       |                 |       |      |       |
| NOW accounts                                                                                   |       | —               |       | 33,884                  |       | 11,294                   |       | 11,294               |       | 56,472    |       |
| Money market  accounts                                                                         |       | 21,188               |       | 21,187                  |       | —                   |       | —               |       | 42,375    |       |
| Savings  deposits                                                                              |       | —               |       | 21,222                  |       | 7,074                    |       | 7,074                |       | 35,370    |       |
| Time  deposits                                                                                 |       | 108,515              |       | 24,999                  |       | 19,813                   |       | —               |       | 153,327   |       |
| Total  interest-bearing deposits                                                               |       | 129,703              |       | 101,292                 |       | 38,181                   |       | 18,368               |       | 287,544   |       |
| Other  borrowings                                                                              |       | 25,698               |       | 1,500                   |       | 10,710                   |       | 27,743               |       | 65,651    |       |
| Total  interest-bearing liabilities                                                            |       | 155,401              |       | 102,792                 |       | 48,891                   |       | 46,111               |       | 353,195   |       |
|                                                                                           |       |                 |       |                    |       |                     |       |                 |       |      |       |
| Period gap                                                                                     |       | $                    | 14,941     |                    | $          | (7 ,722                  | )          | $                    | 43,768     |      | $          | (10,111 | ) | $ | 40,876 |   |
| Cumulative  gap                                                                                |       | $                    | 14,941     |                    | $          | 7,219                    |       | $                    | 50,987     |      | $          | 40,876 |   | $ | 40,876 |   |
| Ratio of  cumulative gap to total earning assets                                               |       | 3.79                 | %          | 1.83                    | %          | 12.94                    | %          | 10.37                | %          | 10.37     | %          |
|                                                                                                |            |                      |            |                         |            |                          |            |                      |            |           |            |  |  |  |  |  |  |  |

 

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(1)          Thereare no loans classified as non-accrual as of December 31, 2004

(2)          Securitiesbased on amortized cost

 

Thecompany generally would benefit from increasing market rates of interest whenit has an asset-sensitive gap and generally would benefit from decreasingmarket rates of interest when it is liability sensitive.  The company currently is asset sensitivewithin one year.  However, the company’sgap analysis is not a precise indicator of its interest sensitivityposition.  The analysis presents only astatic view of the timing of maturities and repricing opportunities, without takinginto consideration that changes in interest rates do not affect all assets andliabilities equally.  Net interest incomeis also impacted by other significant factors, including changes in the volumeand mix of earning assets and interest-bearing liabilities.  The GAP analysis includes the carryingamounts of interest rate sensitive assets and liabilities in the periods inwhich they next reprice to market rates or mature.  To reflect anticipated prepayments, certainasset and liability categories are shown in the table using estimated cashflows rather than contractual cash flows. Through simulation modeling management monitors the effect that animmediate and sustained change in interest rates of 100 basis points and 200basis points up and down will have on net-interest income over the next twelvemonths.

 

21

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Based on the manyfactors and assumptions used in simulating the effect of changes in interestrates, the following table estimates the percentage change in net interestincome at December 31, 2004 over the next twelve months.

 

*NetInterest Income Sensitivity*

 
| **Change in  short-term  interest  rates** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| +200bp                                     |       | + 1.56     | %          |
| +100bp                                     |       | + 0.96     | %          |
| Flat                                       |       | —     |       |
| -100bp                                     |       | - 6.44     | %          |
| -200bp                                     |       | - 14.33    | %          |

 

As a result of thesize of the investment portfolio that was acquired in the DutchFork merger andthe amount and type of fixed rate longer term investments that were in theportfolio, management has put a great deal of emphasis on restructuring theportfolio since October 1, 2004. The purpose was to shorten the average life of the portfolio and acquireinvestments that provided cash flow and/or were adjustable rateinstruments.  Although this resulted in areduction in investment yield, management believes that the restructuringpositions the bank more appropriately for interest rate volatility and providesa significant amount of additional cash flow to fund desired loan growth.

 

Provision andAllowance for Loan Losses

 

The company hasdeveloped policies and procedures for evaluating the overall quality of itscredit portfolio and the timely identification of potential problemcredits.  Management’s judgment as to theadequacy of the allowance is based upon a number of assumptions about futureevents which it believes to be reasonable, but which may or may not prove to beaccurate.  Thus, there can be noassurance that charge-offs in future periods will not exceed the allowance forloan losses or that additional increases in the loan loss allowance will not berequired.

 

Additions to theallowance for loan losses, which are expensed as the provision for loan losseson the company’s income statement, are made periodically to maintain theallowance at an appropriate level based on management’s analysis of thepotential risk in the loan portfolio.  Asof December 31, 2003 management implemented a system for allocating theallowance for loan losses to specific components of the loan portfolio.  Prior to December 31, 2003 the allowancewas allocated on an overall portfolio basis. Allocation of the allowance to specific loan components is notnecessarily indicative of future losses or future allocations.  The entire allowance is available to absorb lossesin the loan portfolio. The objective of management has been to fund the allowancefor loan losses at approximately 1.1% to 1.5% of total loans until a testedhistorical loss experience has been established.  During 2002, management began to build theallowance to the mid to upper range of this objective due to declining economicconditions and increased charge-offs in 2001 and 2002.  During the first six months of 2003, thecompany recovered certain of these charge-offs and slightly exceeded its targetfor the allowance for loan losses.  As aresult, the provision for loan losses was funded at a lower amount throughout2003 as compared to 2002.  The provisionof $245,000 in 2004 maintained the allowance for loan loss within management’sdesired levels.  The amount of theprovision is a function of the level of loans outstanding, the level ofnonperforming loans, historical loan loss experience, the amount of loan lossesactually charged against the reserve during a given period, and current andanticipated economic conditions. Management has also established a loan review process to ensure that itsloan loss allowance is adequate.  Thisprocess includes a review by the management senior credit committee of allloans originated for $100,000 or more. In addition, all loan relationships with aggregate credit of $500,000 ormore are reviewed annually and loans regardless of amount criticized orclassified by management in accordance with regulatory guidelines are reviewedquarterly.

 

At December 31,2004 and 2003, the allowance for loan losses amounted to $2.8 million and $1.7million, respectively. This represents 1.48% and 1.41% of outstanding loans at December 31,2004 and 2003, respectively.  At December 31,2004 the company had no loans in a non-accrual status.  At December 31, 2003 and 2002 thecompany had non-accrual loans in the amount of $80,000 and $144,000,respectively.  There was $411,000,$96,000 and $340,000 in loans delinquent greater than 30 days at December 31,2004, 2003 and 2002, respectively.  Therewere $80,000, $109,000 and $24,000 in loans greater than 90 days delinquent at December 31,2004, 2003 and 2002, respectively.  Theprovision for loan losses was $245,000, $167,000 and $677,000 for the yearsended December 31, 2004, 2003 and 2002, respectively.  As a result of the merger with DutchFork, thebank acquired an

 

22

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allowance for loanlosses in the amount of $995,000.

 

*Allowance for Loan Losses*

(Dollarsin thousands)

 
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Average  loans outstanding                |       | $        | 141,793    |     | $          | 111,928  |       | $        | 93,992     |     | $          | 79,466 |   | $ | 60,001 |   |
| Loans  outstanding at period end          |       | $        | 186,771    |     | $          | 121,009  |       | $        | 99,991     |     | $          | 87,519 |   | $ | 67,984 |   |
| Total  non-performing loans               |       | —   |       | $        | 80         |     | $          | 144      |       | $        | 404        |   | — |   |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Beginning  balance of allowance           |       | $        | 1,705      |     | $          | 1,525    |       | $        | 1,000      |     | $          | 873 |   | $ | 704 |   |
| Loans  charged-off:                       |       |     |       |     |       |     |       |     |       |     |       |
| 1-4 family  residential mortgage          |       | 5        |       | 27       |       | —   |       | 7        |       | —   |       |
| Home equity                               |       | —   |       | —   |       | —   |       | —   |       | 5        |       |
| Commercial                                |       | 196      |       | 157      |       | 156      |       | 270      |       | —   |       |
| Installment  & credit card            |       | 93       |       | 51       |       | 16       |       | 7        |       | 2        |       |
| Total loans  charged-off                  |       | 294      |       | 235      |       | 172      |       | 284      |       | 7        |       |
| Recoveries:                               |       |     |       |     |       |     |       |     |       |     |       |
| 1-4 family  residential mortgage          |       | —   |       | —   |       | —   |       | —   |       | —   |       |
| Home equity                               |       | —   |       | —   |       | 19       |       | —   |       | —   |       |
| Commercial                                |       | 90       |       | 247      |       | 1        |       | 4        |       | 14       |       |
| Installment  & credit card            |       | 23       |       | 1        |       | —   |       | —   |       | 1        |       |
| Total  recoveries                         |       | 113      |       | 248      |       | 20       |       | 4        |       | 15       |       |
| Net loans  charged off (recovered)        |       | 181      |       | (13      | )          | 152      |       | 280      |       | (8       | )          |
| Provision  for loan losses                |       | 245      |       | 167      |       | 677      |       | 407      |       | 161      |       |
| Purchased in  acquisition                 |       | 995      |       | —   |       | —   |       | —   |       | —   |       |
| Balance at  period end                    |       | $        | 2,764      |     | $          | 1,705    |       | $        | 1,525      |     | 1,000      |   | $ | 873 |   |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Net charge  -offs to average loans        |       | 0.13     | %          | (0.01    | %)         | 0.16     | %          | 0.35     | %          | (0.02    | )%         |
| Allowance as  percent of total loans      |       | 1.48     | %          | 1.41     | %          | 1.53     | %          | 1.14     | %          | 1.28     | %          |
| Non-performing  loans as % of total loans |       | —   |       | 0.07     | %          | 0.14     | %          | 0.46     | %          | —   |       |
| Allowance as  % of non-performing loans   |       | —   |       | 2123.60  | %          | 1059.03  | %          | 247.52   | %          | —   |       |

 

*Allocation of the Allowancefor Loan Losses*

*(In thousands)*

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **Amount**            | ** ** | **% of  loans in  category** | ** ** | **Amount** | ** ** | **% of  loans in  category** | ** ** |
| Commercial,  Financial and Agricultural |       | $                     | 1,215      |   | 10.2 | % | $ | 167 |   | 9.5 | % |
| Real Estate  Construction               |       | 13                    |       | 4.3 | % | 214 |   | 6.4 | % |
| Real Estate  Mortgage:                  |       |                  |       |   |   |   |   |   |   |
| Commercial                              |       | 780                   |       | 51.8 | % | 792 |   | 60.1 | % |
| Residential                             |       | 228                   |       | 19.0 | % | 293 |   | 9.8 | % |
| Consumer                                |       | 89                    |       | 14.7 | % | 85 |   | 14.2 | % |
| Unallocated                             |       | 439                   |       | N/A |   | 36 |   | N/A |   |
| Total                                   |       | $                     | 2,764      |   | 100.0 | % | $ | 1,705 |   | 100.0 | % |

 

Accrual of interest isdiscontinued on loans when management believes, after considering economic andbusiness conditions and collection efforts that a borrower’s financialcondition is such that the collection of interest is doubtful.  A delinquent loan is generally placed innonaccrual status when it becomes 90 days or more past due.  At the time a loan is placed in nonaccrualstatus, all interest, which has been accrued on the loan but remains unpaid isreversed and deducted from earnings as a reduction of reported interestincome.  No additional interest isaccrued on the loan balance until the collection of both principal and interestbecomes reasonably certain.

 

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Noninterest Income andExpense

 

*NoninterestIncome.* The company’sprimary source of noninterest income is service charges on depositaccounts.  In addition, the companyoriginates mortgage loans that are closed in the name of a third party forwhich the company receives a fee.  Othersources of noninterest income are derived from commissions on sale ofnon-deposit investment products, bankcard fees, ATM/debit card fees,commissions on check sales, safe deposit box rent, wire transfer and officialcheck fees.  Noninterest income for theyear ended December 31, 2004 was $1.8 million as compared to $1.4 millionfor 2003, an increase of $339,000, or 23.2%. This increase is primarily a result of the growth in deposit accountbalances and the related deposit account fees as well as increases in ATM/debitcard fees and ATM surcharge fees. Deposit service charges amounted to $880,000 in 2004 as compared to$700,000 in 2003.  ATM/debit card feesand ATM surcharge fees increased approximately $80,000 in 2004 as compared to2003.  This increase resulted frominstalling ATM’s at all branch locations as well as increased usage in cardactivity as a result of increases in numbers of accounts.

 

Noninterest income amountedto $1.2 million in 2002.  The increase in2003 of $208,000, or 16.8%, as compared to 2002 is also primarily attributableto increased deposit account balances and the related deposit accountfees.  Deposit account fees increased$113,000, or 19.3%, in 2003 as compared to 2002.  In addition, mortgage loan fees increasedapproximately $43,000 from $300,000 in 2002 to $343,000 in 2003.  Record low market interest rates contributedsignificantly to increased new home sales and home refinancing throughout 2003and 2002.  As a result of the merger withDutchFork in October 2004, noninterest income for three new offices wasincluded in the results of operation for the last quarter of 2004.

 

*NoninterestExpense.* In the very competitive financial services industry, management recognizesthe need to place a great deal of emphasis on expense management andcontinually evaluates and monitors growth in discretionary expense categoriesin order to control future increases. The company has expanded its branch network over the last five years andopened of its eleventh office in February 2005.  Along with this branch expansion the companyhas continued to improve the support infrastructure to enable the company toeffectively manage the growth experienced over the last five years.  As a result of the merger with DutchFork in October 2004,expenses associated with operating the three new offices were included in theresults of operations for the last quarter of 2004.  As a result of management’s expansionstrategy all categories of noninterest expense have continued to increase overthe last several years.  Managementanticipates that they will continue to seek de novo branch expansionopportunities in key markets within the midlands of South Carolina.

 

Noninterest expenseincreased to $8.0 million for the year ended December 31, 2004 from $6.2million for the year ended December 31, 2003.  Salary and employee benefits increased$957,000 in 2004 as compared to 2003. Due to an increase in the number of fulltime equivalent employees from 70 at December 31, 2003 to 115 at December 31,2004. We added approximately 30 employees in connection with the merger withDutchFork.  The other new employees werehired to support the continued growth of the bank.  Equipment expense increased by $188,000, or23.4%, in 2004 as compared to 2003.  Thisis primarily attributable to increased depreciation and maintenance contractexpense related to equipment purchased to upgrade and improveexisting technology, including an upgrade to our main processor and item processingequipment needed to support increased volumes subsequent to the merger withDutchFork.  During 2003, the companyintroduced an internet banking product, upgraded the teller and new accountplatform systems and upgraded the ATM and debit card processing system.  A full year’s depreciation and maintenanceexpense on these additions are included in the results for 2004.  The company continues to evaluate itstechnology systems in order to enhance its delivery of services.  Noninterest expense in 2004, 2003 and 2002includes amortization of the deposit premium intangible of $280,000, $179,000and $185,000, respectively, related to the merger with DutchFork in October 2004and the acquisition of the Chapin office in February 2001.  The deposit premium of $1.2 million relativeto the Chapin branch acquisition and the $2.9 million related to the DutchForkmerger are being amortized on a straight-line basis over a period of sevenyears.  Marketing and public relationsexpense for 2004 increased by $52,000 as a result of planned increases inadvertising for 2004.

 

TheSarbanes-Oxley Act of 2002, and the rules and regulations promulgated by theSecurities and Exchange Commission that are now applicable to us, haveincreased the scope, complexity, and cost of corporate governance, reporting,and disclosure.  To comply with certainaspects of the Sarbanes-Oxley Act, particularly section 404, we have hiredan outside consultant to assist with certain documentation and testing ofinternal control functions.  As a resultof an extension granted by the Securities and Exchange Commission tonon-accelerated filers, the company must comply with the provisions of section 404as of December 31, 2006.  As theprocess was put in place to

 

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complyas of December 31, 2005 prior to the extension, management anticipatesmuch of the consulting work will be performed in 2005.  It is anticipated that the direct costrelative to this work will be in the range of $75,000 to $85,000 in 2005.

 

Noninterestexpense increased to $6.2 million for the year ended December 2003 from$5.4 million for the year ended December 31, 2002.  Salary and employee benefit expense increased$566,000 in 2003 as compared to 2002. This increase resulted from an increase of 12 full time equivalentemployees from 58 at December 31, 2002 to 70 at December 31,2003.  Equipment expense increased by$174,000 in 2003 as compared to 2002. Marketing and public relations expense increased by $29,000 in2003 as compared to 2002.  This increaseis attributable to planned increases in advertising to include the continueduse of television media in our markets.

 

The following tablesets forth for the periods indicated the primary components ofnon-interest expense:

(Inthousands)

 
| ** **                      | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                            |       |                             |       |   |   |   |   |
| Salary and  employee benefits   |       | $                                | 4,263      |   | $ | 3,307 |   | $ | 2,740 |   |
| Occupancy                       |       | 489                              |       | 395 |   | 340 |   |
| Equipment                       |       | 992                              |       | 803 |   | 629 |   |
| Marketing  and public relations |       | 325                              |       | 273 |   | 244 |   |
| Data  processing                |       | 127                              |       | 87 |   | 86 |   |
| Supplies                        |       | 191                              |       | 126 |   | 161 |   |
| Telephone                       |       | 206                              |       | 147 |   | 128 |   |
| Correspondent  services         |       | 140                              |       | 78 |   | 72 |   |
| Insurance                       |       | 149                              |       | 141 |   | 113 |   |
| Professional  fees              |       | 190                              |       | 194 |   | 176 |   |
| Postage                         |       | 111                              |       | 85 |   | 75 |   |
| Amortization  of intangibles    |       | 280                              |       | 179 |   | 185 |   |
| Other                           |       | 514                              |       | 343 |   | 428 |   |
|                            |       | $                                | 7,977      |   | $ | 6,158 |   | $ | 5,377 |   |

 

Income Tax Expense

 

Income tax expensesfor the year ended December 31, 2004 were $963,000, or 30.6% of incomebefore taxes, as compared to $965,000, or 34.9% of income before taxes, for theyear ended December 31, 2003. Income taxes for 2002 were $758,000, or 34.1% of income beforetaxes.  The company recognizes deferredtax assets for future deductible amounts resulting from differences in thefinancial statement and tax bases of assets and liabilities and operating losscarry forwards.  A valuation allowance isthen established to reduce the deferred tax asset to the level that it is morelikely than not that the tax benefit will be realized.  The decrease in the effective tax rate in2004 over the prior years is primarily a result of non-taxable dividendsreceived during the fourth quarter of 2004 on preferred stock held in theavailable-for-sale portfolio.  Theseinvestments were owned by DutchFork at the date of the merger.  Subsequent to the merger and as a result ofrestructuring certain holdings within the portfolio, a significant portion ofthese securities have been sold.  It isanticipated that the current holdings will continue to reduce the company’seffective tax rate.  At current establishedfederal and state statutory income tax rates, it is anticipated that effectiveincome tax rate for the company will remain between 30.0% to 34.0 % of incomebefore taxes in the future.

 

*Financial Position*

 

Total assets at December 31,2004 were $455.7 million as compared to $215.0 million at December 31,2003.  Average earning assets increasedto $257.9 million during 2004 as compared to $190.3 million during 2003.  Asset growth included an organic growth inloans of $14.6 million during 2004.  Loansat December 31, 2004 were $186.8 as compared to $121.0 million at December 31,2003.  The increase includes $51.2million in loans acquired in the merger with DutchFork.  Investment securities increased from $59.0 atDecember 31, 2003 to $196.0 million at December 31, 2004, whichincludes $122.4 million acquired in the merger with DutchFork.  The organic growth in assets was primarilyfunded by an increase in deposit account balances of $17.0 million.  Deposit and borrowings acquired in the mergerwith DutchFork amounted to $134.9 million and $38.6 million, respectively.  Shareholders’

 

25

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equity totaled $50.5million at December 31, 2004 as compared to $19.5 million at December 31,2003.  The increase was a result ofretained earnings of $1.8 million, stock issued in the merger valued at $29.8million, and proceeds from issuance of stock under stock option plans and thedividend reinvestment plan of  $315,000.  These increases were offset by an increase ofthe unrealized loss on available-for-sale securities $1.0 million during 2004.

 

Earning Assets

 

*Loans.*  Loans typically provide higher yields thanthe other types of earning assets, and thus one of the bank’s goals is to haveloans be the largest category of the bank’s earning assets.  At December 31, 2003 loans accounted for60.6% of earning assets as compared to 47.6% of earning assets at December 31,2004.  As a result of the merger withDutchFork, the ratio of loans to total earning assets decreased considerably.  In evaluating the merger with DutchFork,management considered the need to leverage the existing deposit base in theNewberry County market through quality growth of the loan portfolio.  The growth of the loan portfolio both intotal dollars and as a percentage of total earning assets will continue to be amajor focus throughout 2005 and thereafter. Associated with the higher loan yields are the inherent credit andliquidity risks which management attempts to control and counterbalance.  Management is committed to achieving itsasset mix goals without sacrificing asset quality.  Loans averaged $141.8 million during 2004, ascompared to $111.9 million in 2003.

 

The followingtable shows the composition of the loan portfolio by category:

(In thousands)

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                | ** ** | **Amount**            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Commercial,  financial & agricultural |       | $                     | 19,001     |   | 10.2 | % | $ | 11,518 |   | 9.5 | % | $ | 10,688 |   | 10.7 | % |
| Real estate:                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Construction                              |       | 8,066                 |       | 4.3 | % | 7,782 |   | 6.4 | % | 7,533 |   | 7.5 | % |
| Mortgage –  residential              |       | 35,438                |       | 19.0 | % | 11,804 |   | 9.8 | % | 11,055 |   | 11.1 | % |
| Mortgage –  commercial               |       | 96,811                |       | 51.8 | % | 72,668 |   | 60.1 | % | 55,290 |   | 55.3 | % |
| Consumer                                  |       | 27,455                |       | 14.7 | % | 17,237 |   | 14.2 | % | 15,425 |   | 15.4 | % |
| Total gross  loans                        |       | 186,771               |       | 100.0 | % | 121,009 |   | 100.0 | % | 99,991 |   | 100.0 | % |
| Allowance  for loan losses                |       | (2,764                | )          |   |   | (1,705 | ) |   |   | (1,525 | ) |   |   |
| Total net  loans                          |       | $                     | 184,007    |   |   |   | $ | 119,303 |   |   |   | $ | 98,466 |   |   |   |

 

In the context of thisdiscussion, a real estate mortgage loan is defined as any loan, other thanloans for construction purposes, secured by real estate, regardless of thepurpose of the loan.  The company followsthe common practice of financial institutions in the company’s market area ofobtaining a security interest in real estate whenever possible, in addition toany other available collateral.  Thiscollateral is taken to reinforce the likelihood of the ultimate repayment ofthe loan and tends to increase the magnitude of the real estate loancomponents.  Generally the company limitsthe loan-to-value ratio to 80%. The principal components of the company’s loanportfolio, at year-end 2004 and 2003, were commercial mortgage loans in theamount of $96.8 million and $72.7 million, representing 51.8% and 60.1% of theportfolio, respectively.  Significantportions of these commercial mortgage loans are made to finance owner-occupiedreal estate.  Management maintains aconservative philosophy regarding its underwriting guidelines, and believes itwill reduce the risk elements of its loan portfolio through strategies thatdiversify the lending mix.

 

The repayment of loansin the loan portfolio as they mature is a source of liquidity for thecompany.  The following table sets forththe company’s loans maturing within specified intervals at December 31,2004.

 

# **Loan Maturity Schedule andSensitivity to Changes in Interest Rates**

(Inthousands)

 
| ** **                                | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **One Year  or Less**      | ** ** | **Over One  Year Through  Five Years** | ** ** | **Over  Five Years** | ** ** | **Total** | ** ** |
| Commercial,  financial & agricultural |       | $                          | 6,901      |   | $ | 5,549 |   | $ | 6,641 |   | $ | 19,001 |   |
| Real estate  - construction               |       | 6,882                      |       | 1,184 |   | — |   | 8,066 |   |
| All other  loan                           |       | 22,729                     |       | 36,950 |   | 100,025 |   | 159,704 |   |
|                                      |       | $                          | 36,512     |   | $ | 43,593 |   | $ | 106,666 |   | $ | 186,771 |   |
|                                      |       |                       |       |   |   |   |   |   |   |
| Loans  maturing after one year with:      |       |                       |       |   |   |   |   |   |   |
| Fixed  interest rates                     |       |                       |       |   |   |   |   | $ | 81,482 |   |
| Floating  interest rates                  |       |                       |       |   |   |   |   | 68,777 |   |
|                                      |       |                       |       |   |   |   |   | $ | 150,259 |   |

 

26

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Theinformation presented in the above table is based on the contractual maturitiesof the individual loans, including loans which may be subject to renewal attheir contractual maturity.  Renewal ofsuch loans is subject to review and credit approval, as well as modification ofterms upon their maturity.

 

*Investment Securities.*  The investment securities portfolio is asignificant component of the company’s total earning assets.  Total securities averaged $92.9 million in2004, as compared to $60.3 million in 2003. This represents 36.0% and 31.7% of the average earning assets for theyear ended December 31, 2004 and 2003, respectively.  The investment portfolio is more significantat December 31, 2004 as a result of the merger with DutchFork.  At December 31, 2004 the portfolio is49.9% of earning assets.  During thefourth quarter of 2004, and to a lesser extent continuing into 2005, thecombined portfolio was restructured. Although the portfolio acquired fromDutchFork had a large percentage of investments with variable interest rates,the investments did not provide significant cash flow.  The objective of the restructuring was toshorten the maturity and purchase investments that provided ongoing cashflow.  Subsequent to the merger, the company soldavailable-for-sale securities with an approximate carrying value of $56.6million.  The net gain recognized on thesale was $11,000.  The investments wererecorded at fair value at the date of the merger and as a result, there was nota significant difference in the sales price and carrying price of thesesecurities.  The proceeds from thesesales were reinvested primarily in various mortgage-backed securities andcollateralized mortgage obligations. Shortening the life of the portfolio has resulted in a decrease in theoverall yield in the portfolio. Management believes that this enables the company to better manage theinterest rate risk associated with interest rate volatility.  In addition, management’s objective is toincrease the size of the loan portfolio as a percentage of total earning assetsand the restructured portfolio provides the necessary cash flow to meet thisobjective.  Management has continued totake advantage of opportunities to restructure portions of the portfolio in thefirst quarter of 2005, but it is not anticipated that the volume of sales thatthe company experienced in the fourth quarter will continue.  The objective of the company in itsmanagement of the investment portfolio is to maintain a portfolio of highquality, liquid investments.  This policyis particularly important as the company continues to emphasize increasing thepercentage of the loan portfolio to total earning assets.  At December 31, 2004, the estimatedweighted average life of the portfolio was 10.3 years and the weighted averagetax equivalent yield was 4.8%.

 

Thefollowing table shows the investment portfolio composition

(In thousands)

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Securities  available-for-sale at fair value:  |       |                  |       |   |   |   |   |
| U.S.  Treasury                                 |       | $                     | 998        |   | $ | 3,027 |   | $ | 4,338 |   |
| U.S.  Government agency                        |       | 63,735                |       | 35,596 |   | 45,919 |   |
| Mortgage-backed  securities                    |       | 71,055                |       | 14,395 |   | 13,812 |   |
| Equity and  other                              |       | 54,202                |       | 941 |   | 699 |   |
|                                           |       | 190,010               |       | 53,959 |   | 64,768 |   |
| Securities  held-to-maturity (amortized cost): |       |                  |       |   |   |   |   |
| State and  local government                    |       | 6,006                 |       | 4,985 |   | 5,007 |   |
| Other                                          |       | 10                    |       | 10 |   | 10 |   |
|                                           |       | 6,016                 |       | 4,995 |   | 5,117 |   |
| Total                                          |       | $                     | 196,026    |   | $ | 58,954 |   | $ | 69,885 |   |
|                                                |            |                       |            |  |  |  |  |  |  |  |  |  |

 

27

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The following tableshows, at carrying value, the scheduled maturities and average yields ofsecurities held.

 

*Investment Securities MaturityDistribution and Yields*

(Inthousands)

 
| ** **                                      | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **Within One Year**        | ** ** | **After One But  Within Five Years** | ** ** | **After Five But  Within Ten Years** | ** ** | **After Ten Years** | ** ** |
| ** **                                      | ** ** | **Amount**                 | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| Held-to-maturity:                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and  local government                     |       | $                          |       |   |   |   | $ | 658 |   | 4.27 | % | $ | 1,960 |   | 3.86 | % | $ | 3,394 |   | 3.87 | % |
| Other                                           |       |                       |       |   |   | 10 |   | 5.85 | % |   |   |   |   |   |   |   |   |
| Total  investment securities held-to-Maturity   |       |                       |       |   |   | 668 |   | 4.29 | % | 1,960 |   | 3.86 | % | 3,394 |   | 3.87 | % |
|                                            |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale:                             |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  treasury                                  |       | 998                        |       | 2.78 | % |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies                       |       | 8,682                      |       | 3.46 | % | 41,668 |   | 3.43 | % | 13,405 |   | 4.01 | % |   |   |   |   |
| Mortgage-backed  securities                     |       | 29,919                     |       | 3.95 | % | 26,258 |   | 4.20 | % | 7,258 |   | 3.93 | % | 7,620 |   | 3.71 | % |
| Other                                           |       | 5,030                      |       | 3.83 | % | 1,998 |   | 7.53 | % | 1,995 |   | 4.03 |   | 45,179 |   | 7.93 | % |
| Total  investment securities available-for-sale |       | 44,629                     |       | 3.81 | % | 69,924 |   | 3.83 | % | 22,658 |   | 3.99 | % | 52,799 |   | 7.35 | % |
| Total  investment securities                    |       | $                          | 44,629     |   | 3.81 | % | $ | 70,586 |   | 3.83 | % | $ | 24,618 |   | 3.98 | % | $ | 56,193 |   | 7.14 | % |

 

*Short-TermInvestments.*  Short-term investments, which consist offederal funds sold, securities purchased under agreements to resell andinterest bearing deposits, averaged $23.2 million in 2004, as compared to $18.1million in 2003.  At December 31,2004, short-term investments totaled $9.9 million. These funds are a primarysource of the company’s liquidity and are generally invested in an earningcapacity on an overnight basis.

 

Deposits and Other Interest-BearingLiabilities

 

*Deposits.*  Average deposits were $232.5 million during2004, compared to $176.8 million during 2003. Average interest-bearing deposits were $190.9 million in 2004, ascompared to $144.4 million in 2003.

 

28

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The following tablesets forth the deposits of the company by category:

 

(Inthousands)

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                        | ** ** | **Amount**            | ** ** | **% of  Deposits** | ** ** | **Amount** | ** ** | **% of  Deposits** | ** ** | **Amount** | ** ** | **% of  Deposits** | ** ** |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Demand  deposit accounts          |       | $                     | 49,520     |   | 14.7 | % | $ | 37,045 |   | 20.0 | % | $ | 27,124 |   | 16.1 | % |
| NOW accounts                      |       | 59,723                |       | 17.7 | % | 33,660 |   | 18.2 | % | 30,207 |   | 18.0 | % |
| Money market  accounts            |       | 39,124                |       | 11.6 | % | 23,355 |   | 12.6 | % | 27,920 |   | 16.6 | % |
| Savings  accounts                 |       | 35,370                |       | 10.5 | % | 11,223 |   | 6.0 | % | 9,818 |   | 5.8 | % |
| Time  deposits less than $100,000 |       | 100,629               |       | 29.9 | % | 45,125 |   | 24.4 | % | 46,647 |   | 27.8 | % |
| Time  deposits more than $100,000 |       | 52,698                |       | 15.6 | % | 34,850 |   | 18.8 | % | 26,346 |   | 15.7 | % |
|                              |       | $                     | 337,064    |   | 100.0 | % | $ | 185,258 |   | 100.0 | % | $ | 168,062 |   | 100.0 | % |

 

Core deposits, whichexclude certificates of deposit of $100,000 or more, provide a relativelystable funding source for the company’s loan portfolio and other earningassets.  The company’s core deposits were$284.4 million and $150.4 million at December 31, 2004 and 2003, respectively.  A stable base of deposits is expected to bethe company’s primary source of funding to meet both its short-term andlong-term liquidity needs in the future. The company acquired $134.9 million in deposits as a result of themerger with DutchFork.

 

Thematurity distribution of the company’s time deposits is shown in the followingtable.

 

### **Maturities of Certificates ofDeposit and Other Time Deposit of $100,000 or more**

 

(Inthousands)

 
| ** **                                   | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **Within Three  Months**   | ** ** | **After Three  Through  Six Months** | ** ** | **After Six  Through  Twelve Months** | ** ** | **After  Twelve  Months** | ** ** | **Total** | ** ** |
|                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Certificates  of deposit of $100,000 or more |       | $                          | 12,565     |   | $ | 7,051 |   | $ | 17,345 |   | $ | 15,737 |   | $ | 52,698 |   |
|                                              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Therewere no other time deposits of $100,000 or more at December 31, 2004.

 

Largecertificate of deposit customers tend to be extremely sensitive to interestrate levels, making these deposits less reliable sources of funding forliquidity planning purposes than core deposits. Some financial institutions partially fund their balance sheets usinglarge certificates of deposits obtained through brokers.  These brokered deposits are generallyexpensive and can be unreliable as long-term funding sources. Accordingly, the companydoes not currently accept brokered deposits.

 

*Borrowed funds.* Borrowed funds consist of short-term borrowings in the form ofsecurities sold under agreements to repurchase, Federal Home Loan Bank advancesand long-term debt as a result of issuing $15.0 million in trust preferredsecurities.  Short-term borrowingsaveraged $5.9 million, $6.0 and $5.2 million during 2004, 2003 and 2002,respectively.  The maximum month-endbalance during 2004, 2003 and 2002 was $7.6 million, $8.2 million and $7.3million, respectively.  The average ratepaid during these periods was 0.71%, 0.51% and 0.51%, respectively.  The repurchase agreements are generallyoriginated with customers that have other relationships with the company andtend to provide a stable and predictable source of funding.  As a member of the Federal Home Loan Bank ofAtlanta (FHLB Atlanta), the bank has access to advances from the FHLB Atlantafor various terms and amounts.  During2004 and 2003, the average outstanding advances amounted to$13.4 million and$1.9 million, respectively.  The companyacquired $38.6 million in FHLB advances in the merger with DutchFork.

 

29

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Thefollowing is a schedule of the maturities for Federal Home Loan BankAdvances as of December 31, 2004 and 2003:

 
| ** **         | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|
| **(In thousands)** | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **Maturing**       | ** ** | **Amount**            | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| 2004               |       | $                     | —     |   | — |   | $ | 1,000 |   | 1.60 | % |
| 2005               |       | 2,500                 |       | 2.08 | % | 2,500 |   | 2.08 | % |
| 2006               |       | 1,500                 |       | 2.83 | % | 1,500 |   | 2.83 | % |
| 2008               |       | 10,710                |       | 3.42 | % |   |   |   |   |
| 2010               |       | 27,742                |       | 3.64 | % |   |   |   |   |
|               |       | 42,452                |       | 3.46 | % | $ | 5,000 |   | 2.24 | % |
|                    |            |                       |            |  |  |  |  |  |  |  |  |

 

*Purchase premiums included inadvances acquired in the merger with DutchFork reflected in the advancesmaturing in 2008 and 2010 amount to $710,000 and $2.7 million, respectively, atDecember 31, 2004.  The coupon rateon these advances is 5.67% and 5.76%, respectively.  In addition to the above borrowings, thecompany issued $15.0 million in trust preferred securities on September 16,2004. The securities accrue and pay distributions quarterly at a rate of LIBORplus 257 basis points.  The debt may beredeemed in full anytime after September 16, 2009 with notice and matureon September 16, 2034.*

 

*Capital*

 

Total shareholders’equity as of December 31, 2004 was $50.5 million at December 31, 2004as compared with shareholders’ equity of $19.5 million as of December 31,2003. This increase was attributable to retained net income for the year ended December 31,2004, of $1.8 million offset by an increase in the net unrealized loss of $1.0million net of tax effect in the market value of investment securitiesavailable-for sale. The company also issued 1,169,898 shares of common stockvalued at $29.8 million in connection with the merger with DutchFork.  During 2004, the company paid quarterly cashdividends of $.05 per share. The company paid a $.04 per share dividend in thefirst quarter of 2003 and $.05 per share dividends for the second through thefourth quarter of 2003. The company also paid a $.04 per share dividends in thesecond through the fourth quarter of 2002. The company introduced a dividend reinvestment plan in the third quarterof 2003.  The plan allows existingshareholders the option of reinvesting cash dividends as well as makingoptional purchases of up to $5,000 in the purchase of common stock per quarter.

 

Under the capitalguidelines of the Federal Reserve and the OCC, the company and the bank arecurrently required to maintain a minimum risk-based total capital ratio of 8%,with at least 4% being Tier 1 capital. Tier 1 capital consists of common shareholders’ equity, qualifyingperpetual preferred stock, and minority interests in equity accounts ofconsolidated subsidiaries, less goodwill. In addition, the bank must maintain a minimum Tier 1 leverage ratio(Tier 1 capital to total assets) of at least 4%, but this minimum ratio isincreased by 100 to 200 basis points for other than the highest-ratedinstitutions.  The trust preferredsecurities in the amount of $15.0 million that were issued on September 16,2004 qualify as tier 1 capital under the regulatory guidelines and are includedin the amounts reflected below.

 

30

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The company and thebank exceeded their regulatory capital ratios at December 31, 2004 and2003, as set forth in the following table.

 
| **Analysis of Capital  (In thousands)**                                     | ** ** | **Required  Amount** | ** ** | **%**  | ** ** | **Actual  Amount** | ** ** | **%**  | ** ** | **Excess  Amount** | ** ** | **%**  | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|--------|------------|--------------------|------------|--------|------------|--------------------|------------|--------|------------|
| The Bank:                                                                   |       |                 |       |   |       |               |       |   |       |               |       |   |       |
| December 31,  2004  Risk Based Capital      Tier 1 |       | $                    | 11,576     |   | 4.0        | %                  | $          | 33,158 |       | 11.5               | %          | $      | 21,582     |   | 6.5 | % |
| Total  Capital                                                              |       | 23,152               |       | 8.0    | %          | 35,922             |       | 12.4   | %          | 12,770             |       | 4.4    | %          |
| Tier 1  Leverage                                                            |       | 17,367               |       | 4.0    | %          | 33,158             |       | 7.6    | %          | 15,791             |       | 3.6    | %          |
|                                                                        |       |                 |       |   |       |               |       |   |       |               |       |   |       |
| December 31,  2003  Risk Based Capital      Tier 1 |       | $                    | 5,613      |   | 4.0        | %                  | $          | 15,295 |       | 10.9               | %          | $      | 9,682      |   | 6.9 | % |
| Total  Capital                                                              |       | 11,225               |       | 8.0    | %          | 17,000             |       | 12.1   | %          | 5,775              |       | 4.1    | %          |
| Tier 1  Leverage                                                            |       | 8,280                |       | 4.0    | %          | 15,295             |       | 7.4    | %          | 7,015              |       | 3.4    | %          |
|                                                                        |       |                 |       |   |       |               |       |   |       |               |       |   |       |
| The Company:                                                                |       |                 |       |   |       |               |       |   |       |               |       |   |       |
| December 31,  2004  Risk Based Capital      Tier 1 |       | $                    | 11,612     |   | 4.0        | %                  | $          | 37,485 |       | 12.9               | %          | $      | 25,873     |   | 8.2 | % |
| Total  Capital                                                              |       | 23,224               |       | 8.0    | %          | 40,249             |       | 13.9   | %          | 17,025             |       | 5.9    | %          |
| Tier 1  Leverage                                                            |       | 17,614               |       | 4.0    | %          | 37,485             |       | 8.5    | %          | 19,871             |       | 4.5    | %          |
|                                                                        |       |                 |       |   |       |               |       |   |       |               |       |   |       |
| December 31,  2003  Risk Based Capital      Tier 1 |       | $                    | 5,635      |   | 4.0        | %                  | $          | 18,607 |       | 13.2               | %          | $      | 12,972     |   | 9.2 | % |
| Total  Capital                                                              |       | 11,269               |       | 8.0    | %          | 20,312             |       | 14.4   | %          | 9,043              |       | 6.4    | %          |
| Tier 1  Leverage                                                            |       | 8,395                |       | 4.0    | %          | 18,607             |       | 8.9    | %          | 11,072             |       | 4.9    | %          |

 

###### **LiquidityManagement**

###### ** **

Liquidity managementinvolves monitoring the company’s sources and uses of funds in order to meetits day-to-day cash flow requirements while maximizing profits.  Liquidity represents the ability of a companyto convert assets into cash or cash equivalents without significant loss and toraise additional funds by increasing liabilities.  Liquidity management is made more complicatedbecause different balance sheet components are subject to varying degrees ofmanagement control.  For example, thetiming of maturities of the investment portfolio is very predictable andsubject to a high degree of control at the time investment decisions aremade.  However, net deposit inflows andoutflows are far less predictable and are not subject to nearly the same degreeof control.  Asset liquidity is providedby cash and assets which are readily marketable, or which can be pledged, orwhich will mature in the near future. Liability liquidity is provided by access to core funding sources,principally the ability to generate customer deposits in the company’s marketarea.  In addition, liability liquidityis provided through the ability to borrow against approved lines of credit(federal funds purchased) from correspondent banks and to borrow on a securedbasis through securities sold under agreements to repurchase.  The bank is a member of the FHLB Atlanta andhas the ability to obtain advances for various periods of time.  These advances would be secured by securitiespledged by the bank or assignment of loans within the bank’s portfolio.

 

With the successfulcompletion of the initial common stock offering in 1995, the secondary offeringcompleted in July 1998, and the trust preferred offering completed in September 2004,the company has maintained a high level of liquidity that has been adequate tomeet planned capital expenditures, as well as providing the necessary cashrequirements of the company and the bank needed for operations.  The company’s funds sold and short-terminterest bearing deposits position, its primary source of liquidity, averaged$22.2 million during the year ended December 31, 2004, and was $9.9million at December 31, 2004.  Thecompany also maintains federal funds purchased lines, in the amount of $10.0million with several financial institutions, although these were not utilizedin 2004. The

 

31

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FHLB Atlanta hasapproved a line of credit of up to 15% of the bank assets which would becollateralized by a pledge against specific investment securities and oreligible loans.  Management regularlyreviews the liquidity position of the company and has implemented internalpolicies establishing guidelines for sources of asset based liquidity and limitthe total amount of purchased funds used to support the balance sheet andfunding from non core sources. Management believes that its existing stable base of core deposits alongwith continued growth in this deposit base will enable the company to meet itslong term liquidity needs successfully.

 

###### **Impactof Inflation**

###### ** **

Unlike most industrialcompanies, the assets and liabilities of financial institutions such as thecompany and the bank are primarily monetary in nature.  Therefore, interest rates have a moresignificant effect on the company’s performance than do the effects of changesin the general rate of inflation and change in prices.  In addition, interest rates do notnecessarily move in the same direction or in the same magnitude as the pricesof goods and services.  As discussedpreviously, management seeks to manage the relationships between interestsensitive assets and liabilities in order to protect against wide interest ratefluctuations, including those resulting from inflation.

 

32

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**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 Notes toConsolidated 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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**FIRSTCOMMUNITY CORPORATION**

**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.

 

38

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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. Feescharged for originating loans, if any, are deferred and offset by the deferralof certain direct expenses associated with loans originated. The net deferredfees are recognized as yield adjustments by applying the interest method.

 

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, generallywhen a loan becomes 90 days past due. When interest accrual is discontinued,all unpaid accrued interest is reversed. Interest income is subsequentlyrecognized only to the extent cash payments are received first to principal andthen 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 and upto 10 years for furniture, fixtures and equipment.

 

39

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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.

 

41

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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.

 

42

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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.

 

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 $0.00 and$80,292.  These loans were recorded at orbelow fair value.  The average recordedinvestment in loans classifed as impaired for the years ended December 31, 2004and 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.

 

43

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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. 

 

44

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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 aggregateliquidation amount of $15,000,000. The Trust I securities accrue and paydistributions quarterly at a rate per annum equal to LIBOR plus 257 basispoints.  The distributions arecummulative and payable in arrears.  Thecompany has the right, subject to events of default, to defer payments ofinterest on the Trust I securities for a period not to exceed 20 consecutivequarters, provided no extension can extend beyond the maturity date ofSeptember 16, 2034.  The Trust Isecurities are mandatorily redeemable upon maturity of September 16, 2034.  If the Trust I securities are redeemed on orafter September 16, 2009, the redemption price will be 100% of the principalamount plus accrued and unpaid interest. The Trust I securities may be redeemedin whole but not in part, at any time prior to September 16, 2009 following theoccurrence of a tax event, a capital treatment event or an investment company event.  Currently these securities qualify underrisk-based capital guidelines as Tier 1 capital, subject to certainlimitations.  The company has no currentintention to exercise its right to defer payments of interest on the Trust Isecurities. 

 

45

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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 ondiscounted cash flows using current market rates for borrowings with similarterms.

 

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 primary marketarea. 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, a substantialportion of its debtors ability to honor their contracts is dependent upon the economicstability 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 the yearended December 31, 2004, 2003 and 2002 the plan expense amounted to $137,177,$106,398 and $93,130 respectively. The Company matches 50% of an employeescontribution 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’s activitiesor entitled to receive a majority of the entity’s residual returns, orboth.  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 classified aseither available-for-sale or held-to-maturity under SFAS No. 115 and providesguidance 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 8.  Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.**

 

None.

 

**Item8A.  Controls and Procedures**

 

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures asdefined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our current disclosure controls andprocedures are effective as of December 31, 2004.  There have been no significant changesin our internal controls over financial reporting during the fourth fiscalquarter ended December 31, 2004 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

The design of any system of controls and proceduresis based in part upon certain assumptions about the likelihood of futureevents.  There can be no assurance thatany design will succeed in achieving its stated goals under all potentialfuture conditions, regardless of how remote.

 

**PART III**

 

**Item 9.  Directors,Executive Officers, Promoters and Control Persons; Compliance with Section16(a) of the Exchange Act**

 

Inresponse to this Item, the additional information contained on pages 3 through6 and on page 13 of our Proxy Statement for the Annual Meeting of Shareholdersto be held on May 18, 2005 is incorporated herein by reference.

 

Wehave adopted a Code of Ethics that applies to our directors, executive officers(including our principal executive officer and principal financial officer) andemployees in accordance with the Sarbanes-Oxley Corporate Responsibility Act of2002.  The Code of Ethics is available onour web site at: www.firstcommunitysc.com.

 

**Item 10.  Executive Compensation.**

 

The information required by this item is set forthunder “Compensation of Directors and Executive Officers” on pages 6 through 7of our Proxy Statement for the Annual Meeting of Shareholders to be held on May18, 2005, which information is incorporated herein by reference.

 

58

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**Item 11.  Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

 

The following table sets forth equity compensation plan information at December 31, 2004.  All information has been adjusted for any stock splits and stock dividends effected during the periods presented.

 

 

 
| ** **                                                 | ** ** | **Equity Compensation Plan Information**                                                            | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                          | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (c)  (excluding securities  reflected in column(a))** | ** ** |
| ** **                                                 | ** ** | **(a)**                                                                                             | ** ** | **(b)** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity compensation plans approved by  security holders(1) |       | 136,752                                                                                             |       | $ | 10.23 |   | 84,583 |   |
|                                                       |       |                                                                                                |       |   |   |   |   |
| Total(2)                                                   |       | 136,752                                                                                             |       | $ | 10.23 |   | 84,583 |   |

 

----

(1)                                  The number of shares of common stock availablefor issuance under the 1999 Stock Incentive Plan automatically increases on thefirst trading day each calendar year beginning January 1, 2000, by an amountequal to 3% of the shares of common stock outstanding.

 

(2)                                  The total does not include 180,685 shares witha weighted average exercise price of $9.23 issuable under the First CommunityCorporation / DutchFork Bancshares, Inc. Stock Incentive Plan.  This plan and the outstanding awards wereassumed by us in connection with the merger with DutchFork Bancshares,Inc.  We are not authorized to make anyadditional awards under this plan.

 

The additional information required by this item isset forth under “Security Ownership of Certain Beneficial Owners and Management”on page 9 of our Proxy Statement for the Annual Meeting of Shareholders to beheld on May 18, 2005, which information is incorporated herein by reference.

 

**Item 12.  Certain Relationshipsand Related Transactions.**

 

The information required by this item is set forthunder “Certain Relationships and Related Transactions” on page 12 of our ProxyStatement for the Annual Meeting of Shareholders to be held on May 18, 2005,which information is incorporated herein by reference.

 

**Item 13. Exhibits.**

 

3.1                                 Amended and Restated Articles ofIncorporation (incorporated by reference to Exhibit 3.1 to the company’sRegistration Statement No. 33-86258 on Form S-1).

 

3.2                                 Bylaws (incorporated by reference toExhibit 3.2 to the company’s Registration Statement No. 33-86258 onForm S-1).

 

4.1                                 Provisions in the company’s Articles ofIncorporation and Bylaws defining the rights of holders of    the company’s Common Stock (incorporated byreference to Exhibit 4.1 to the company’s Registration StatementNo. 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 toExhibit 10.1 to the company’s Registration Statement No. 33-86258 on Form S-1).*

 

59

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10.2                           Employment Agreement dated June 1, 1994,by and between James C. Leventis and the Company (incorporated by reference toExhibit 10.2 to the company’s Registration Statement No. 33-86258 on Form S-1).*

 

10.3                           1996Stock Option Plan and Form of Option Agreement (incorporated by reference toExhibit 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 StockIncentive Plan and Form of Option Agreement (Incorporated by reference to theCompany’s 1998 Annual Report and Form 10-KSB).*

 

10.5                           Employment Agreement dated September 2, 2002by and between David K. Proctor and the Company (incorporated by reference toExhibit 10.4 to the company’s 2002 annual report and Form 10-KSB).*

 

10.6                           Employment Agreement dated June 12, 2002by and between Joseph G. Sawyer and the Company (incorporated by reference toExhibit 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

 

24.1                           Power of Attorney (contained on the signaturepage hereto).

 

31.1                           Rule13a-14(a) Certification of the Chief Executive Officer.

 

31.2                           Rule13a-14(a) Certification of the Chief Financial Officer.

 

32                                    Section1350 Certifications.

 

----

*                 Management contract of compensatory plan orarrangement required to be filed as an Exhibit to this Annual Report onForm 10-KSB.

 

**Item 14. Principal Accountant Fees andServices**

 

Theinformation required by this item is set forth under “Audit Fees” on pages 11through 12 of our Proxy Statement for the Annual Meeting of Shareholders to beheld on May 18, 2005, which information is incorporated herein by reference.

 

60

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
| Date: March  25, 2005 | **FIRST  COMMUNITY CORPORATION** |
|-----------------------|----------------------------------|
|                  |                             |
|                  |                             |
|                  | By:                              |   /s/ Michael  C. Crapps |   |
|                  |                             |   | Michael C.  Crapps |
|                  |                             |   | President  and Chief Executive Officer |
|                       |                                  |  |  |  |

 

KNOW ALL MEN BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Michael C. Crapps, histrue and lawful attorney-in-fact and agent, with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this report, and to file thesame, with all exhibits thereto, and other documents in connection therewith,with the Securities and Exchange Commission, granting unto attorney-in-fact andagent full power and authority to do and perform each and every act and thingrequisite or necessary to be done in and about the premises, as fully to allintents and purposes as he might or could do in person, hereby ratifying andconfirming all that attorney-in-fact and agent, or his substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

 

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**               | ** ** | **Title**                      | ** **                 | **Date**        |
|-----------------------------|------------|--------------------------------|----------------------------|-----------------|
| ** **                  | ** ** | ** **                     | ** **                 | ** **      |
| /s/ Richard  K. Bogan       |       | Director                       |                       | March 25,  2005 |
| Richard K.  Bogan           |       |                           |                       |            |
|                        |       |                           |                       |            |
| /s/ Thomas  C. Brown        |       |                           | Director                   |            | March 25,  2005 |
| Thomas C.  Brown            |       |                           |                       |            |
|                        |       |                           |                       |            |
| /s/ Chimin  J. Chao         |       |                           | Director                   |            | March 25,  2005 |
| Chimin J.  Chao             |       |                           |                       |            |
|                        |       |                           |                       |            |
| /s/ Michael  C. Crapps      |       |                           | Director,  President,      |            | March 25,  2005 |
| Michael C.  Crapps          |       | & Chief  Executive Officer |                       |            |
|                        |       |                           |                       |            |
| /s/ Anita B.  Easter        |       |                           | Director                   |            | March 25,  2005 |
| Anita B.  Easter            |       |                           |                       |            |
|                        |       |                           |                       |            |
| /s/ O. A.  Ethridge         |       |                           | Director                   |            | March 25,  2005 |
| O. A.  Ethridge             |       |                           |                       |            |
|                        |       |                           |                       |            |
| /s/ George  H. Fann, Jr.    |       |                           | Director                   |            | March 25,  2005 |
| George H.  Fann, Jr.        |       |                           |                       |            |
|                        |       |                           |                       |            |
| /s/ W. James  Kitchens, Jr. |       |                           | Director                   |            | March 25,  2005 |
| W. James  Kitchens, Jr.     |       |                           |                       |            |
|                        |       |                           |                       |            |
| /s/ James C.  Leventis      |       |                           | Director,  Chairman of the |            | March 25,  2005 |
| James C.  Leventis          |       | Board, &  Secretary        |                       |            |

 

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| /s/ Loretta  R. Whitehead   |   |                              | Director                 |   | March 25,  2005 |
|-----------------------------|--------|-----------------------------------|--------------------------|--------|-----------------|
| Loretta R.  Whitehead       |   |                              |                     |   |
|                        |   |                              |                     |   |
| /s/ Mitchell  M. Willoughby |   |                              | Director                 |   | March 25,  2005 |
| Mitchell M.  Willoughby     |   |                              |                     |   |
|                        |   |                              |                     |   |
| /s/ Joseph  G. Sawyer       |   |                              | Chief  Financial Officer |   | March 25,  2005 |
| Joseph G.  Sawyer           |   | and  Principal Accounting Officer |                     |   |

 

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Exhibit List

 

3.1                                 Amended and Restated Articles ofIncorporation (incorporated by reference to Exhibit 3.1 to the company’sRegistration Statement No. 33-86258 on Form S-1).

 

3.2                                 Bylaws (incorporated by reference toExhibit 3.2 to the company’s Registration Statement No. 33-86258 onForm S-1).

 

4.1                                 Provisions in the company’s Articles ofIncorporation and Bylaws defining the rights of holders of    the company’s Common Stock (incorporated byreference to Exhibit 4.1 to the company’s Registration StatementNo. 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 toExhibit 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 toExhibit 10.2 to the company’s Registration Statement No. 33-86258 on FormS-1).

 

10.3                           1996Stock Option Plan and Form of Option Agreement (incorporated by reference toExhibit 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 StockIncentive Plan and Form of Option Agreement (Incorporated by reference to theCompany’s 1998 Annual Report and Form 10-KSB).

 

10.5                           Employment Agreement dated September 2, 2002by and between David K. Proctor and the Company (incorporated by reference toExhibit 10.4 to the company’s 2002 annual report and Form 10-KSB).

 

10.6                           Employment Agreement dated June 12, 2002by and between Joseph G. Sawyer and the Company (incorporated by reference toExhibit 10.5 to the company’s 2002 annual report and Form 10-KSB).

 

21.1                           Subsidiaries of the company.

 

23                                    Consentof Certified Public Accountants

 

24.1                           Power of Attorney (contained on the signaturepage hereto).

 

31.1                           Rule13a-14(a) Certification of the Chief Executive Officer.

 

31.2                           Rule13a-14(a) Certification of the Chief FinancialOfficer.

 

32                                    Section 1350 Certifications.

 

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