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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 0-25972
FIRST COMMUNITY CORPORATION
(Name of Small Business Issuer in its charter)
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TENNESSEE 62-1562541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
809 WEST MAIN STREET, ROGERSVILLE, TENNESSEE 37857
(Address of principal executive offices) (Zip Code)
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(423) 272-5800
(Issuer's telephone number)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
The issuer's revenues for the fiscal year ending December 31, 1996 were:
$6,373,221
The aggregate market value of the issuer's voting stock held by
non-affiliates, computed by reference to the price at which the stock was sold
as of March 18, 1997, is $13,627,628 for 486,701 shares, at an estimated $28.00
per share.
As of March 24, 1997, 625,505 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, which will be
filed with the Securities and Exchange Commission not later than March 28, 1997,
are incorporated by reference into Part III of this annual report on Form
10-KSB.
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CROSS REFERENCE INDEX
TO
FORM 10-KSB
Certain information required by Form 10-KSB is incorporated by reference
from the annual report to shareholders as indicated below. Only that information
expressly incorporated by reference is deemed filed with the Commission.
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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......... None
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........................................ *
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... None
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.................................................. **
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. **
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................ *
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* This information is included in this annual report on Form 10-KSB and is not
incorporated by reference from the Company's definitive proxy statement.
** The material required by Items 9 through 12 is incorporated by reference from
the Company's definitive proxy statement pursuant to Instruction E(3) of Form
10-KSB. The Company will file a definitive proxy statement with the
Securities and Exchange Commission not later than March 28, 1997.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
First Community Corporation (the "Company" or "FCC") is a registered bank
holding company which was incorporated under Tennessee law in 1994. The
Company's activities are conducted through its wholly-owned subsidiary, First
Community Bank of East Tennessee (the "Bank"), which began business in 1993 and
was acquired by the Company in 1994. The Bank is a Tennessee state bank, which
was organized in late 1992 shortly after the last locally-owned bank
headquartered in Hawkins County was acquired. From the time of its opening in
April, 1993 until December 31, 1996, the Bank has grown to total assets of more
than $73,000,000.
The Bank's primary trade area is Hawkins County, Tennessee, which had a
population of 44,565 according to the 1990 Census. Current population is
estimated to be approximately 45,000.
At the present time, the Bank operates a full service banking business
providing such customary banking services as checking and savings accounts,
various other types of time deposits, safe deposit facilities and money
transfers. It also finances commercial transactions, makes secured and unsecured
loans, and provides other financial services to its customers. The Bank is not
authorized to provide trust services.
The Bank considers its primary market for loans and deposits to be
individuals, small-to-medium size businesses and professionals in Hawkins
County, Tennessee. The Bank is actively soliciting business in this target
market and considers the potential growth opportunities to be favorable. No
material portion of the Bank's deposits have been obtained from any single
person or group of persons.
The Bank is subject to the regulatory authority of the Department of
Financial Institutions of the State of Tennessee and the Federal Deposit
Insurance Corporation (the "FDIC").
The Bank has two offices in two communities in Hawkins County (Rogersville
and Church Hill). The Church Hill office was opened in December of 1994, and
provides the Bank with a state-of-the-art banking facility in the center of
Church Hill's commercial district. Management of the Bank was able to secure
access for this branch onto U.S. Highway 11-W, which required several
governmental approvals, and such access affords the Church Hill branch with
exceptional customer convenience. The Church Hill branch positions the Company
and the Bank to serve the densely populated east Hawkins County and Kingsport
markets with a full range of deposit and loan services. The Bank had
approximately 48 full-time equivalent employees (excluding maintenance
employees) as of December 31, 1996. Although the Bank has been in existence only
three years, the Bank believes that its staff possesses a high degree of
experience and expertise. Coming primarily from other East Tennessee banking
institutions, staff members have banking experience ranging from one to thirty-
four years.
COMPETITION
Competition for consumer demand and savings deposits is quite intense in
Hawkins County. Such competition is heightened by the fact that Tennessee law
now permits any bank or savings association located in Tennessee to branch in
any county in Tennessee. The Bank currently competes in the Hawkins County area
with five commercial banks and two savings associations. The Bank also competes
generally with insurance companies, credit unions, and other financial
institutions, and institutions which have expanded into the quasi-financial
market, including some institutions that are much larger than the Bank. Many of
the institutions with which the Bank competes have been located in Hawkins
County for many years and have much greater resources, deposit strength and
expertise than the Bank and they offer services which the Bank does not provide
to its customers.
LOANS
Various types of secured and unsecured commercial, consumer and real estate
loans are offered by the Bank. The Bank's current policy is to make loans
primarily to borrowers who maintain depository relationships
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with the Bank or reside or work in the Bank's market areas. Real estate loans
usually are made only when such loans are secured by real property located in
Hawkins or Sullivan Counties. In addition, the Bank purchases sales finance
contracts for motor vehicles.
The Bank provides each lending officer with written loan guidelines.
Lending authority is delegated by the Board of Directors to loan officers, each
of whom has limited authority to extend secured and unsecured credit. Any credit
in excess of $150,000 must have the approval of the Loan Committee of the Board
of Directors (the "Loan Committee"), which consists of both management and
non-management directors of the Bank. All unsecured loans in excess of $10,000
must receive, prior to the issuance of any loan commitment, the approval of a
senior lending officer.
LOAN REVIEW
The Bank continually reviews its loan portfolio to determine deficiencies
and the corrective actions to be taken. The review process is handled internally
independent of loan origination responsibilities. A minimum of 30% of total
loans is reviewed annually and 100% of borrowers with aggregate indebtedness in
excess of $100,000. Past due loans are reviewed by an internal loan officer
committee, and a summary report of such loans is reviewed monthly by the Loan
Committee. A report of loan review findings is presented quarterly to the Bank's
Board of Directors.
INVESTMENT POLICY
The Bank's general investment portfolio policy is to maximize income
consistent with liquidity, asset quality and regulatory constraints and to
maintain assets which can be pledged to secure government deposits. This policy
is reviewed from time to time by both the Bank's Investment Committee and the
Board of Directors. Individual transactions, portfolio composition and
performance are reviewed and approved quarterly by the Board of Directors or a
committee thereof. The President of the Bank implements the policy and reports
to the full Board of Directors on a monthly basis information as to maturities,
sales, purchases, resultant gains or losses, average maturity, federal taxable
equivalent yields and appreciation or depreciation by investment category.
MONETARY POLICIES
The result of operations of the Bank and the Company are affected by credit
policies of monetary authorities, particularly the Federal Reserve Board. The
instruments of monetary policy employed by the Federal Reserve Board include
open market operations in U.S. government securities, changes in the discount
rate on bank borrowings and changes in reserve requirements against bank
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effects of actions by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or the
effect of such matters on the business and earnings of the Company.
PERSONNEL
At December 31, 1996, the Company had approximately 48 full-time equivalent
employees. The Company is not a party to any collective bargaining agreement and
believes that its employee relations generally are good.
SUPERVISION AND REGULATION
GENERAL. The Company and the Bank are subject to extensive regulation
under state and federal statutes and regulations. The discussion in this
section, which briefly summarizes certain of such statutes, does not purport to
be complete, and is qualified in its entirety by reference to such statutes.
Other state and federal legislation and regulations directly and indirectly
affecting banks and other financial institutions likely are to be enacted or
implemented in the future; however, such legislation and regulations and their
effect on the business of the Company and the Bank cannot be predicted.
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FIRST COMMUNITY CORPORATION
The Company is a bank holding company subject to the supervision of the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
under the Bank Holding Company Act of 1956, as amended. As a bank holding
company, the Company is required to file annual reports with, and is subject to
examination by, the Federal Reserve Board.
FIRST COMMUNITY BANK OF EAST TENNESSEE
The Bank is incorporated under the banking laws of the State of Tennessee,
and as such, is subject to provisions of the Tennessee Banking Act and the
supervision of and regular examination by the Tennessee Department of Financial
Institutions (the "Department"). The Bank is a member of the FDIC and,
therefore, also is subject to the provisions of the Federal Deposit Insurance
Act and to supervision and examination by the FDIC.
CAPITAL. The Federal Reserve Board and the FDIC have adopted final
risk-based capital guidelines for bank holding companies. The minimum guidelines
for the ratio of total capital ("Total Capital") to risk weighted assets
(including certain off balance sheet activities, such as standby letters of
credit) is 8.00%. At least half of the Total Capital must be composed of "Tier 1
or core capital," which consists of common stockholders' equity, minority
interests in the equity accounts of consolidated subsidiaries non-cumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, less goodwill ("Tier 1 Capital"). The remainder, Tier 2 Capital, may
consist of subordinated debt, other preferred stock and a limited amount of loan
loss reserves. At December 31, 1996, the Company's risk-based Tier 1 Capital and
risk-based Total Capital ratios were 15.84% and 17.09%, respectively.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum leverage ratio (Tier 1 Capital to total assets, less goodwill) of 4% to
5% for most bank holding companies. The Company's leverage ratio at December 31,
1996 was 10.36%.
Failure to meet FDIC capital requirements can subject an FDIC-insured state
bank to a variety of enforcement remedies, including issuance of a capital
directive, termination of deposit insurance and a prohibition on the taking of
brokered deposits. Substantial additional restrictions can be imposed under the
"prompt corrective action" regulations, as described below.
PAYMENT OF DIVIDENDS. The Company is a legal entity separate and distinct
from the Bank. The principal source of the Company's revenues, however, is from
dividends declared by the Bank. Under Tennessee law, the Bank can only pay
dividends out of its undivided profits, which at December 31, 1996 were
approximately $200,000. This amount will be increased by the Bank's net earnings
and decreased by any losses. Any transfer from the Bank's surplus account to
undivided profits requires the prior approval of the Commissioner of the
Department. The Bank's ability to pay dividends also may depend on its ability
to meet minimum capital levels established from time to time by FDIC. Under such
regulations, FDIC-insured state banks are prohibited from paying dividends,
making other distributions or paying any management fee to a parent if, after
such payment, the Bank would fail to have a risk-based Tier 1 Capital ratio of
4%, a risk-based Total Capital ratio of 8% and a Tier 1 leverage capital ratio
of 4%.
Under Tennessee law, the Company may pay common stock dividends if, after
giving effect to the dividends, the Company can pay its debts as they become due
in the ordinary course of business and the Company's total assets exceed its
total liabilities. The payment of dividends by the Company also may be affected
or limited by certain factors, such as the requirements to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank holding company or a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), such authority may take various supervisory actions
to prevent such action, including a cease and desist order prohibiting such
practice. In 1996, the Bank obtained prior regulatory approval to pay a dividend
to its shareholders. This
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dividend, in the amount of $.60 per share was paid January 6, 1997 to
shareholders of record on December 20, 1996.
THE COMPANY'S SUPPORT OF THE BANK. Under Federal Reserve Board policy, the
Company is expected to act as a source of financial strength and to commit
resources to the Bank. Such support may be required at times when, absent such
Federal Reserve Board policy, the Company may not be inclined to provide it.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank must be assumed
by the bankruptcy trustee and entitled to a priority of payment over certain
other creditors.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the Federal banking regulators to assign to each insured
institution one of five capital categories ("well capitalized", "adequately
capitalized" or one of three under-capitalized categories) and to take
progressively more restrictive regulatory actions depending upon the assigned
category. Under the "prompt corrective action" regulations adopted pursuant to
FDICIA, in order to be considered "adequately capitalized", national banks must
have a risk-based Tier 1 Capital ratio of at least 4%, a risk-based Total
Capital ratio of 8% and a Tier 1 leveraged capital ratio of at least 4%.
Well-capitalized institutions are those which have a risk-based Tier 1 Capital
ratio above 6%, a risk-based Total Capital ratio above 10% and a Tier 1
leveraged capital ratio above 5%, and which are not subject to a written
agreement, order or capital directive to maintain capital at a specific level.
As of December 31, 1996, the Bank was considered a "well capitalized"
institution under these definitions.
All institutions, regardless of their capital levels, are restricted from
making any capital distribution or paying any management fees that would cause
the institution to fail to satisfy the minimum levels to be considered
adequately capitalized. An institution that fails to meet the minimum level for
any relevant capital measure (an "undercapitalized institution") is: (i) subject
to increased monitoring by the appropriate federal banking regulator, (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of business. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters. Pursuant to the guarantee,
the institution's holding company would be liable up to the lesser of 5% of the
institution's total assets or the amount necessary to bring the institution into
capital compliance as of the date it failed to comply with its capital
restoration plan. If the controlling bank holding company fails to fulfill its
obligations under the guarantee and files (or has filed against it) a petition
under the Federal Bankruptcy Code, the appropriate federal banking regulator
could have a claim as a general creditor of the bank holding company, and, if
the guarantee were deemed to be a commitment to maintain capital under the
Federal Bankruptcy Code, the claim would be entitled to priority in such
bankruptcy proceeding over third-party creditors and shareholders of the bank
holding company.
The bank regulatory agencies have discretionary authority to reclassify
well-capitalized institutions as adequately capitalized or to impose on
adequately capitalized institutions requirements or actions specified for
undercapitalized institutions if the agency determines after notice and an
opportunity for hearing that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, which can
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consist of the receipt of an unsatisfactory examination rating if the
deficiencies cited are not corrected. A significantly undercapitalized
institution, as well as any undercapitalized institution that did not submit an
acceptable capital restoration plan, may be subject to regulatory demands for
recapitalization, broader applications of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible placement of directors and officers, and restrictions
on capital distributions by any bank holding company controlling the
institution. Any company controlling the institution could also be required to
divest the institution or the institution could be required to divest
subsidiaries. The senior executive officers of a significantly undercapitalized
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt. If an institution's ratio of tangible capital
to total assets falls below a level established by the appropriate federal
banking regulator (the "Critical capital level"), which may not be less than 2%
nor more than 65% of the minimum tangible capital level otherwise required, the
institution will be subject to conservatorship or receivership within 90 days
unless periodic determinations are made that forbearance from such action would
better protect the deposit insurance fund. Unless appropriate findings and
certifications are made by the appropriate federal bank regulatory agencies, a
critically undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized.
ACQUISITION AND EXPANSION. The Bank Holding Company Act requires any bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire substantially all the assets of any bank, or ownership or control
of any voting shares of any bank, if, after acquiring such shares, it would own
or control directly or indirectly, more then 5% of the voting shares of such
bank. Effective September 29, 1995, the Tennessee Bank Structure Act of 1974 was
amended to, among other things, prohibit (subject to certain exceptions) a bank
holding company from acquiring a bank for which the home state is Tennessee if,
upon consummation, the company would directly or indirectly control 30% or more
of the total deposits in insured depository institutions in Tennessee. As of
December 31, 1996, the Company estimates it held less than 1% of such deposits.
Subject to certain exceptions, the Tennessee Bank Structure Act prohibits a bank
holding company from acquiring a bank in Tennessee which has been in operation
for less than five years. Tennessee banks may open additional branches in any
county in the state.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorizes interstate acquisitions of banks and bank holding
companies without geographic limitation beginning one year after enactment. In
addition, beginning June 1, 1997, a bank may merge with a bank in another state
as long as neither of the states has opted out of interstate branching between
the date of enactment of the IBBEA and May 31, 1997. The IBBEA further provides
that states may enact laws permitting interstate merger transactions prior to
June 1, 1997. A bank may establish and operate a de novo branch in a state in
which the bank does not maintain a branch if that state expressly permits de
novo branching. Once a bank has established branches in a state through an
interstate merger transaction, the bank may establish and acquire additional
branches at any location in the state where any bank involved in the interstate
merger transaction could have established or acquired branches under applicable
federal or state law. A bank that has established a branch in a state through de
novo branching may establish and acquire additional branches in such state in
the same manner and to the same extent as a bank having a branch in such state
as a result of an interstate merger. If a state opts out of interstate branching
within the specified time period, no bank in any other state may establish a
branch in the opting out of state, whether through an acquisition or de novo.
Tennessee law allows banks and bank holding companies in any state to acquire
banks and bank holding companies in Tennessee provided that the state in which
such acquiror is headquartered also permits Tennessee banks and bank holding
companies to acquire banks and bank holding companies in that state.
Acquisitions of banks or bank holding companies in Tennessee require the
approval of the Commissioner of Financial Institutions.
The Bank Holding Company Act also prohibits a bank holding company, with
certain exceptions, from acquiring more than 5% of the voting shares of any
company that is not a bank and from engaging in any business other than banking
or managing or controlling banks. The Federal Reserve Board is authorized to
approve ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be
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a proper incident thereto. Certain activities have been found to be closely
related to banking by Federal Reserve Board regulations, including operating a
trust company, mortgage company, finance company or factoring company;
performing data processing operations; providing investment advice; and engaging
in certain kinds of credit-related insurance activities.
FDIC INSURANCE ASSESSMENTS; DIFA. The FDIC reduced the insurance premiums
it charges on bank deposits insured by the Bank Insurance Fund ("BIF") to the
statutory minimum of $2,000.00 for "well capitalized" banks, effective January
1, 1996. Premiums related to deposits assessed by the Savings Association
Insurance Fund ("SAIF"), including savings association deposits acquired by
banks, continued to be assessed at a rate of between 23 cents and 31 cents per
$100.00 of deposits. On September 30, 1996, the Deposit Insurance Funds Act of
1996 ("DIFA") was enacted and signed into law. DIFA provided for a special
assessment to recapitalize the SAIF to bring the SAIF up to statutory required
levels. The assessment imposed a one-time fee to banks that own previously
acquired thrift deposits of $.526 per $100 of thrift deposits they held at March
31, 1995. This assessment did not apply to the Company. DIFA further provides
for assessments to be imposed on insured depository institutions with respect to
deposits insured by the BIF (in addition to assessments currently imposed on
depository institutions with respect to SAIF-insured deposits) to pay for the
cost of Financing Corporation ("FICO") bonds. All banks will be assessed to pay
the interest due on FICO bonds starting on January 1, 1997. The Company expects
the cost to the Company to be immaterial.
Under the FDICIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.
CERTAIN TRANSACTIONS BY THE COMPANY WITH ITS AFFILIATES. There also are
various legal restrictions on the extent to which the Company and any nonbank
subsidiary can borrow or otherwise obtain credit from its bank subsidiaries. An
insured bank and its subsidiaries are limited in engaging in "covered
transactions" with its nonbank or nonsavings bank affiliates to the following
amounts: (i) in the case of any such affiliate, the aggregate amount of covered
transactions of the insured bank and its subsidiaries will not exceed 10% of the
capital stock and surplus of the insured bank; and (ii) in the case of all
affiliates, the aggregate amount of covered transactions of the insured bank and
its subsidiaries will not exceed 20% of the capital stock and surplus of the
Bank. "Covered transactions" are defined by statute to include a loan or
extension of credit, as well as purchase of securities issued by an affiliate, a
purchase of assets (unless otherwise exempted by the Federal Reserve Board), the
acceptance of securities issued by the affiliate as a collateral for a loan and
the issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Further, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
RECENT BANKING LEGISLATION. In addition to the matters discussed above,
FDICIA made other extensive changes to the federal banking laws.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating
to: (i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards must prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss, but (subject to certain exceptions) may
not prescribe specific compensation levels or ranges for directors, officers or
employees. In addition, the federal banking regulatory agencies would be
required to prescribe by regulation standards specifying: (i) maximum classified
assets to capital ratios; (ii) minimum earnings sufficient to absorb losses
without impairing capital; and (iii) to the extent feasible, a minimum ratio of
market value to book value for publicly-traded shares of depository institutions
and depository institution holding companies.
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BROKERED DEPOSITS. FDICIA amends the Federal Deposit Insurance Act to
prohibit insured depository institutions that are not well-capitalized from
accepting brokered deposits unless a waiver has been obtained from the FDIC.
Deposit brokers will be required to register with FDIC.
CONSUMER PROTECTION PROVISIONS. FDICIA seeks to encourage enforcement of
existing consumer protection laws and enacts new consumer-oriented provisions
including a requirement of notice to regulators and customers for any proposed
branch closing and provisions intended to encourage the offering of "lifeline"
banking accounts and lending in distressed communities. FDICIA also requires
depository institutions to make additional disclosures to depositors with
respect to the rate of interest and the terms of their deposit accounts.
MISCELLANEOUS. FDICIA extends the deadline for the mandatory use of
state-certified and state-licensed appraisers and authorizes acquisitions of
banks by savings associations on the same terms as savings associations may be
acquired by banks. With certain exceptions, state-chartered banks are limited to
the activities of national banks. Within nine months of the date of enactment of
FDICIA, the federal bank regulatory agencies are required to adopt uniform
regulations for real estate mortgage and construction loans. The federal bank
regulatory agencies are required to biannually review risk-based capital
standards to ensure that they adequately address interest rate risk,
concentration of credit risk and risks from non-traditional activities.
FDICIA also made extensive changes in the applicable rules regarding audit,
examinations and accounting. FDICIA generally requires annual on-site full-scope
examinations by each bank's primary federal regulator. FDICIA also imposes new
responsibilities on management, the independent audit committee and outside
accountants to develop, approve or attest to reports regarding the effectiveness
of internal controls, legal compliance and off-balance-sheet liabilities and
assets.
Interest Rate Limitations. The maximum permissible rates of interest on
most commercial and consumer loans made by the Bank are governed by Tennessee's
general usury. Certain other usury laws affect limited classes of loans, but the
laws referenced above are by far the most significant. Tennessee's general usury
law authorizes a floating rate of 4% per annum and also allows certain loan
charges, generally on a more liberal basis than does the general usury law.
Effect of Government Policies. The earnings and business of the Company
are and will be affected by the policies of various regulatory authorities of
the United States, especially by the Federal Reserve Board. The Federal Reserve
Board, among other functions, regulates the supply of credit and deals with
general economic conditions within the United States. The instruments of
monetary policy employed by the Federal Reserve Board for these purposes
influence in various ways the overall level of investments, loans, other
extensions of credit and deposits, and the interest rates paid on liabilities
and received on assets.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's main office is located at 809 West Main Street in Rogersville
in a one-story brick building owned by the Company. An additional drive-through
facility, constructed on property adjacent to the main office, opened in
February 1997. The Bank owns additional properties on West Main and East Main
Streets that will be used for future expansion. In addition, the Bank operates a
branch in Church Hill, Hawkins County, Tennessee, and the Bank owns the 4,800
square foot building and property on which the Church Hill branch is located.
The Bank developed an acre of commercial property adjoining the Church Hill
branch, and that extra property will eventually be sold by the Bank. The Bank
owns an ATM at each of the Main office and Church Hill locations.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Bank is named as a defendant in suits arising from
the ordinary conduct of its affairs. In the opinion of management, the ultimate
outcome of the litigation to which the Bank is a party as of the date of this
Form 10-KSB will not adversely affect its financial condition.
7
<PAGE> 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ending December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is not traded on an exchange nor is there a
known active trading market. Based solely on information made available to the
Company from a limited number of buyers and sellers, management of the Company
believes that the following table sets forth the high and low sales prices for
the Company's common stock during 1996 and 1995:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1996
First quarter............................................. 22.00 20.00
Second quarter............................................ 25.00 22.00
Third quarter............................................. 25.00 25.00
Fourth quarter............................................ 26.00 25.00
1995
First quarter............................................. 18.00 18.00
Second quarter............................................ 18.50 18.25
Third quarter............................................. 20.00 20.00
Fourth quarter............................................ 20.00 20.00
</TABLE>
The most recent trade of the Company's common stock known to the Company
occurred on March 12, 1997 at a price of $28.00 per share (no stock has been
offered since that date). These sales are isolated transactions and, given the
small volume of trading in the Company's stock, may not be indicative of its
present value. As of March 15, 1997, there were approximately 837 holders of
record of the Company's common stock. The Company's dividend policy is designed
to retain sufficient amounts for healthy financial ratios, considering
anticipated asset growth and other prudent financial management principles. With
prior regulatory approval, the Company declared a dividend of $.60 per share in
1996 and $.30 per share in 1995.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The purpose of this discussion is to provide readers with information
relevant to understanding and assessing the financial condition and results of
operations of First Community Corporation (the Company). The Company's business
activity is currently limited to holding the stock of its wholly-owned
subsidiary, First Community Bank (the Bank). Accordingly, the discussion that
follows relates primarily to the financial condition and results of operations
of First Community Bank. This discussion should be read in conjunction with the
consolidated financial statements and accompanying notes.
First Community Bank is a locally owned independent bank with its primary
market in Hawkins County, Tennessee and the adjoining counties. The Bank
provides a wide range of financial services including commercial and consumer
loans, residential mortgage loans, a wide range of deposit products, letters of
credit, and safe deposit facilities.
FINANCIAL CONDITION
EARNING ASSETS. At December 31, 1996, earning assets were $67 million,
compared to $55 million at December 31, 1995. This increase is due to an $9.6
million increase in portfolio loans and a $3.6 million increase in investment
securities.
Economic growth in the local market has enabled the Bank to achieve
continued loan growth. Commercial, financial and agricultural loans increased
$2.9 million (41%). In addition, real estate lending
8
<PAGE> 11
increased $6.5 million (29%) due partially to the vigorous local housing market.
Average loans for 1996 were 73.3% of average earning assets compared to 72.6% in
1995. Management attributes the increasing trend in loan composition to their
focus on improving the earning asset composition and strong loan demand.
Due to a regulatory change eliminating unrealized gain or loss on
available-for-sale securities from regulatory capital, the Financial Accounting
Standards Board (FASB) issued a Special Report allowing a one-time opportunity
for security transfers between held-to-maturity and available-for-sale without
affecting the carrying value of other securities in the investment portfolio. In
December 1995, management reassessed its classification of investment securities
and transferred, at fair value, $8,942,000 of investment securities from
held-to-maturity to available-for-sale. The reclassification provides management
greater flexibility in managing liquidity and in changing the Bank's earning
asset mix.
FUNDING SOURCES. Management relies upon local area deposits as a stable
source of funding. The Bank had total deposits of $57.6 million as of December
31, 1996, compared to $49.6 million as of December 31, 1995. Average 1996
deposits increased 23.8%, or $10.8 million to $56.4 million from $45.6 million
in 1995. Certificates of deposit (generally the Bank's highest rate paying
deposit) accounted for most of the deposit growth in 1996 and 1995. During 1996
and 1995, to fund loan growth, management increased marketing efforts and
offered attractive rates for certificates of deposit. Average 1996 certificates
of deposits increased 41%, or $8.8 million to $30.3 million from $21.4 million
in 1995. Average certificate of deposit growth for 1995 was $7.3 million (52%).
The Bank has no brokered deposits.
The deposit base is supplemented with alternative funding sources, Federal
funds purchased and securities sold under agreements to repurchase and Federal
Home Loan Bank (FHLB) advances, to fund loan growth. The average balances of
Federal funds purchased and securities sold under agreements to repurchase and
FHLB advances amounted to $3.9 million, $2.8 million, and $0 for the years ended
December 31, 1996, 1995, and 1994, respectively. Due to the highly competitive
local market for deposits, management anticipates the continued use of
alternative funding sources to partially fund loan growth.
NONPERFORMING ASSETS AND RISK ELEMENTS. Nonperforming assets consist of
(1) nonaccrual loans where the recognition of interest income was discontinued,
(2) loans which have been restructured to provide for a reduction or deferral of
interest or principal because the borrower's financial condition deteriorated,
and (3) foreclosed and repossessed assets. Nonperforming assets at December 31,
1996 were .4% ($202,000) of total loans and foreclosed and repossessed assets,
up from $4,000 at December 31, 1995.
Past due loans are loans contractually past due 90 days or more as to
interest or principal payments, but have not yet been placed on nonaccrual
status. Past due loans were $137,000 or .26% of total loans at December 31,
1996, as compared to $131,000 or .3% of total loans at December 31, 1995.
Management's policy is to maintain the allowance for loan losses at a level
sufficient to absorb all estimated losses inherent in the loan portfolio. The
allowance for loan losses was 1.25% of outstanding portfolio loans at December
31, 1996 and 1995. The allowance is 318% of nonperforming assets as of December
31, 1996.
CAPITAL. Management believes that a strong capital position is vital to
continued profitability and to promote depositor and investor confidence.
Shareholders' equity was $7.5 million or 10.2% of total assets at December 31,
1996, and $8.0 million or 13.3% of total assets at December 31, 1995. Because of
the larger than anticipated growth in deposits, the Company completed a stock
offering in April, 1994 which increased capital by approximately $3,000,000.
During the third and fourth quarters of 1996 the Company purchased and retired
approximately 45,000 shares of its common stock for $25.00 per share. The
subsidiary bank paid a dividend of $1,300,000 to the parent company to fund this
purchase. In addition, in order to facilitate additional purchases of company
stock, the Company has obtained a line of credit from a financial institution of
$1,500,000, with $200,000 outstanding at December 31, 1996.
Unrealized gain or loss on securities held for sale, net of applicable
income taxes, is recorded directly to shareholders' equity. To record the fair
value of securities held for sale, shareholders' equity was increased by
$34,282, and reduced by $17,353 at December 31, 1996 and 1995, respectively.
First Community Bank's earnings performance over the past two years allowed
the board of directors, with prior regulatory approval in 1995, to declare a
dividend of $.60 per share in 1996 and $.30 per share in 1995. Additionally, the
board of directors develops and reviews the capital goals of First Community
9
<PAGE> 12
Corporation and the Bank. The Company's dividend policy is designed to retain
sufficient amounts for healthy financial ratios, considering anticipated asset
growth and other prudent financial management principles.
Capital adequacy in the banking industry is evaluated primarily by the use
of ratios which measure capital against assets that are weighted based on risk
characteristics. These "risk-based" capital ratios are presented in Note 11 to
the consolidated financial statements. First Community Bank's capital ratios
substantially exceed regulatory minimums and compare favorably to industry
averages.
LIQUIDITY AND INTEREST RATE RISK
Liquidity management involves planning to meet depositors' and borrowers'
cash flow requirements at a reasonable cost, as well as developing contingency
plans to meet unanticipated funding needs or a loss of funding sources. The
Bank's consumer deposits provide stability with respect to liquidity. In
addition, anticipated membership in the Federal Home Loan Bank will provide a
cost-effective alternate source of funding.
Interest rate risk is the risk that future changes in interest rates will
reduce the Bank's net interest income and the market value of its portfolio
equity. A movement in interest rates and the corresponding effect on net
interest income may significantly affect profitability. The degree of any
potential consequences of such interest rate changes can be mitigated by
maintaining a balance between interest rate sensitive assets and liabilities
within given time frames. Management endeavors to maintain consistently strong
earnings with minimal interest rate risk by closely monitoring the sensitivity
and repricing of assets and liabilities to interest rate fluctuations.
The difference between assets and liabilities within a given repricing
period is expressed as a ratio and as a dollar amount known as the "gap", both
of which are used as a measure of interest rate risk. A ratio of 100% suggests a
balanced position between rate sensitive assets and liabilities within a given
repricing period. The table below reflects the Bank's interest rate sensitivity
position both individually and within specified time periods and cumulatively,
over various time horizons. In the table, assets and liabilities are placed in
categories based on their actual or expected repricing date. As indicated, at
December 31, 1996, the ratio of rate-sensitive assets to rate-sensitive
liabilities maturing or repricing within one year or less is (49%), a negative
one-year gap position. In a period of generally falling interest rates, this gap
position will normally result in a increase in net interest income. Whereas, in
a period of generally rising interest rates, this gap position will normally
result in an decrease in net interest income.
10
<PAGE> 13
INTEREST RATE GAP ANALYSIS
<TABLE>
<CAPTION>
REPRICEABLE OR MATURITY WITHIN
-----------------------------------------------------------------
0-3 3-12 TOTAL 1-5 OVER
MONTHS MONTHS 1 YR. YEARS 5 YRS. TOTAL
(000) (000) (000) (000) (000) (000)
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold.......... $ 13 $ -- $ 13 $ -- $ -- $ 13
Investment securities....... -- 1,497 1,497 6,696 6,503 14,696
Loans....................... 11,563 7,413 18,976 32,469 108 51,553
-------- -------- -------- ------- ------- -------
Total interest-earning
assets.................... $ 11,576 $ 8,910 $ 20,486 $39,165 $ 6,611 $66,262
LIABILITIES
Interest-bearing deposits... $ 28,840 $ 17,668 $ 46,508 $ 1,960 $ -- $48,468
Short term borrowings....... 6,945 -- 6,945 -- -- 6,945
-------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities............... $ 35,785 $ 17,668 $ 53,453 $ 1,960 $ -- $55,413
-------- -------- -------- ------- ------- -------
Assets (liability) GAP...... $(24,209) $ (8,758) $(32,967) $37,205 $ 6,611 $10,849
Cumulative asset (liability)
GAP....................... $(24,209) $(32,967) $(32,967) $ 4,238 10,849 10,849
======== ======== ======== ======= ======= =======
Cumulative as a percentage
of interest-bearing
assets.................... (36)% (49)% (49)% 6% 16% 16%
======== ======== ======== ======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994. The Company
recorded net income in 1996 of $879,413, an increase of 45% over 1995 net income
of $605,521. Net income for the year ended December 31, 1995 ("1995"), decreased
5.2% from $638,684 in 1994 to $605,521 in 1995. Net income increased during 1996
because of a higher volume of average earning assets especially in higher
yielding loans. The decrease in 1995 was due primarily to the increase in income
taxes resulting from the fact that 1994 income taxes were reduced significantly
from the utilization of net operating loss carryforwards. Income before income
taxes increased by 26.8% from 1994 to 1995.
Return on average shareholders' equity for the years ended December 31,
1996 and 1995 was 10.1% and 7.2%, respectively. Return on average assets for the
years ended December 31, 1996 and 1995 was 1.2% and 1.1%, respectively.
NET INTEREST INCOME. Net interest income, the Bank's largest single source
of earnings, represents the difference between interest and fees earned on
loans, investments, and other earning assets and the interest paid on deposits
and other liabilities obtained to fund them. The net interest margin is this
difference expressed on a taxable equivalent basis as a percentage of average
earning assets. The margin is influenced by a number of factors, such as the
volume and mix of earning assets and funding sources, the interest rate
environment and income tax rates. The margin is also affected by the level of
earning assets funded by interest free funding sources (primarily
noninterest-bearing demand deposits and equity capital).
Net interest income increased $482,931 (16.7%) in 1996 and $715,240 (32.9%)
in 1995. The increase was attributable to the increase in average earning assets
of $10.2 million (19.5%) in 1996 and $13.5 million (34.6%) in 1995.
PROVISION FOR LOAN LOSSES. The Bank makes monthly provisions for loan
losses in amounts estimated to be sufficient to maintain the allowance for loan
losses at a level considered necessary by management to absorb estimated losses
in the loan portfolio. The provision for loan losses was $161,000, $191,000 and
$172,000 in 1996, 1995 and 1994, respectively. Net chargeoffs to average loans
outstanding was .09% (45,000), .11% (41,000), .06% ($17,000) for 1996, and 1994,
respectively. The allowance for loan losses was 1.25% of outstanding portfolio
loans at December 31, 1996, 1995 and 1994.
11
<PAGE> 14
OTHER INCOME. Other income increased 66% in 1996, 20.8% in 1995 and 119%
in 1994. As a percentage of average assets, other income was .93%, .68% and .75%
for 1996, 1995 and 1994, respectively. Service charges on deposit accounts
increased $175,054 (66%), in 1996, $63,908 (31.7%) in 1995 and $158,903 (372%)
in 1994. Opportunities to improve such fee income are continuously reviewed and
weighed against competitive pressures in the local market.
OTHER EXPENSES. Other expenses increased $333,251 (15.7%), $557,664
(55.8%) and $815,495 (110%) in 1996, 1995 and 1994, respectively. The ratio of
noninterest expense as a percentage of average assets was 3.55%, 3.70% , and
3.66% for 1996, 1995, and 1994, respectively. Salaries and employee benefits,
which comprise almost 50% of total noninterest expense, increased 21.9% in 1996,
37.1% in 1995 and 80.2% in 1994. The ratio of personnel expense has been
relatively constant as a percentage of average total assets and was 1.72% in
1996, 1.70% in 1995, and 1.67% in 1994. Besides a general increase in employee
compensation, the Bank's growth and the opening of an additional branch in 1995
required employment levels to increase.
Most other expense categories increased in 1996, 1995 and 1994. These
increases are the result of the Bank's rapid growth, opening of a new branch in
1995, and costs related to generating other income. However, these increases
were partially offset in 1995 and 1996 by lower deposit assessment rates as the
recapitalization of the FDIC Bank Insurance Fund (BIF) was completed in 1995.
The Bank receives the lowest deposit assessment rate from the FDIC.
PROVISION FOR INCOME TAXES. The Company records a provision for income
taxes currently payable and for taxes payable in the future because of
differences in the timing of recognition of certain items for financial
statement and income tax purposes. The major difference between the effective
tax rate applied to the Company's financial statement income and the federal
statutory rate is caused by state income taxes, net of federal tax benefit. The
Company's effective tax rate was 37.4% in 1996, 37.5% in 1995 and 16.4% in 1994.
As stated above, the low rate in 1994 resulted from utilization of operating
loss carryovers generated in 1993 and 1992. See Note 8 to the consolidated
financial statements for additional details of the Company's income tax
provision.
12
<PAGE> 15
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST REVENUE AND
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table shows the consolidated average monthly balances of each
principal category of assets, liabilities and stockholders' equity of the
Company, and an analysis of net interest revenue, and the change in interest
income and interest expense segregated into amounts attributable to changes in
volume and changes in rates. The table is presented on a taxable equivalent
basis (4).
<TABLE>
<CAPTION>
IN THOUSANDS OF DOLLARS
-----------------------------------------------------------------------------------------
DECEMBER
31, 1996 DECEMBER 31, 1995 1996/1995 CHANGE
----------------------------- ----------------------------- -------------------------
AVERAGE INTEREST REVENUE/ AVERAGE INTEREST REVENUE/ DUE TO DUE TO
BALANCE RATE EXPENSE BALANCE RATE EXPENSE VOLUME RATE(1) TOTAL
------- -------- -------- ------- -------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loans (2 and 3)................ $45,939 10.35% $4,753 $38,112 10.04% $3,827 $786 $140 $ 926
------- ----- ------ ------- ----- ------ ---- ---- ------
Investment securities(4)........... 13,655 5.98 816 12,304 5.30 652 72 92 164
------- ----- ------ ------- ----- ------ ---- ---- ------
Federal funds sold................. 3,096 5.20 161 2,029 5.77 117 62 (18) 44
------- ----- ------ ------- ----- ------ ---- ---- ------
Total earning assets, net
of allowance for loan
losses................... 62,690 9.14% $5,730 $52,445 8.76% $4,596 $920 $214 $1,134
===== ====== ===== ====== ==== ==== ======
Cash and due from banks............ 2,943 2,434
Other assets....................... 3,356 2,385
------- -------
Total assets............... $68,989 $57,264
======= =======
Deposits:
NOW and money market
investments.................... $ 8,594 2.80% $ 241 $8,551 2.40% $ 205 $ 1 $ 35 $ 36
Savings.......................... 8,219 2.91 239 7,602 2.99 227 18 (6) 12
Time deposits $100,000 and
over........................... 8,444 6.60 557 6,655 6.03 401 108 48 156
Other time deposits.............. 21,812 5.32 1,160 14,773 5.44 803 383 (26) 357
------- ----- ------ ------- ----- ------ ---- ---- ------
Total interest-bearing
deposits................. 47,069 4.67 2,197 37,581 4.35 1,636 510 51 561
Non interest-bearing demand
deposits......................... 9,371 -- -- 8,008 -- -- -- -- --
------- ----- ------ ------- ----- ------ ---- ---- ------
Total deposits............. 56,440 3.89 2,197 45,589 3.59 1,636 389 51 561
Other borrowings................... 3,958 4.04 160 2,822 2.48 70 -- 90 90
------- ----- ------ ------- ----- ------ ---- ---- ------
Total deposits and borrowed
funds.................... 60,398 3.90% 2,357 48,411 3.52% 1,706 389 141 651
----- ------ ----- ------ ---- ---- ------
Other liabilities.................. 596 400
Stockholders' equity............... 7,995 8,453
------- -------
Total liabilities and
stockholders' equity..... $68,989 $57,264
======= =======
Net interest income................ $3,373 $2,890 $531 $ 73 $ 483
====== ====== ==== ==== ======
Net yield on earning assets........ 5.38% 5.51%
===== =====
</TABLE>
- ---------------
(1) Changes in interest income and expense not due solely to balance or rate
changes are included in the rate category.
(2) Interest income includes fees on loans of $418,000 in 1996 and $241,000 in
1995.
(3) Nonaccrual loans are included in average loan balances and the associated
income (recognized on a cash basis) is included in interest.
(4) The Company did not have significant tax-exempt income in 1996 or 1995.
13
<PAGE> 16
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST REVENUE AND
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table shows the consolidated average monthly balances of each
principal category of assets, liabilities and stockholders' equity of the
Company, and an analysis of net interest revenue, and the change in interest
income and interest expense segregated into amounts attributable to changes in
volume and changes in rates. The table is presented on a taxable equivalent
basis (4).
<TABLE>
<CAPTION>
IN THOUSANDS OF DOLLARS
-----------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1994 1995/1994 CHANGE
----------------------------- ----------------------------- -------------------------
AVERAGE INTEREST REVENUE/ AVERAGE INTEREST REVENUE/ DUE TO DUE TO
BALANCE RATE EXPENSE BALANCE RATE EXPENSE VOLUME RATE(1) TOTAL
------- -------- -------- ------- -------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loans (2 and 3)................ $38,112 10.04% $3,827 $25,274 10.05% $2,541 $1,291 $ (5) $1,286
------- ----- ------ ------- ----- ------ ------ ----- ------
Investment securities(4)........... 12,304 5.30 652 11,772 4.46 525 24 103 127
------- ----- ------ ------- ----- ------ ------ ----- ------
Federal funds sold................. 2,029 5.77 117 1,921 4.16 80 4 33 37
------- ----- ------ ------- ----- ------ ------ ----- ------
Total earning assets, net
of allowance for loan
losses................... 52,445 8.76% $4,596 38,967 8.07% $3,146 $1,319 $ 131 $1,450
===== ====== ===== ====== ====== ===== ======
Cash and due from banks............ 2,434 2,114
Other assets....................... 2,385 1,475
------- -------
Total assets............... $57,264 $42,556
======= =======
Deposits:
NOW and money market
investments.................... $8,551 2.40% $ 205 $7,169 2.26% $ 162 $ 31 $ 12 $ 43
Savings.......................... 7,602 2.99 227 6,029 2.93 235 (12) 4 (6)
Time deposits $100,000 and
over........................... 6,655 6.03 401 4,718 4.30 203 83 115 198
Other time deposits.............. 14,773 5.44 803 9,336 3.94 368 214 221 435
------- ----- ------ ------- ----- ------ ------ ----- ------
Total interest-bearing
deposits................. 37,561 4.35 1,636 29,252 3.31 968 316 352 666
Non interest-bearing demand
deposits......................... 8,008 -- -- 6,476 -- -- -- -- --
------- ----- ------ ------- ----- ------ ------ ----- ------
Total deposits............. 45,569 3.59 1,636 35,728 2.71 968 267 352 666
Other borrowings................... 2,822 2.46 70 136 2.21 3 -- 67 67
------- ----- ------ ------- ----- ------ ------ ----- ------
Total deposits and borrowed
funds.................... 48,411 3.52% 1,706 35,728 2.71% 971 267 419 735
----- ------ ----- ------ ------ ----- ------
Other liabilities.................. 400 190
Stockholders' equity............... 8,453 6,502
------- -------
Total liabilities and
stockholders' equity..... $57,264 $42,556
======= =======
Net interest income................ $2,890 $2,175 $1,052 $(288) $ 715
====== ====== ====== ===== ======
Net yield on earning assets........ 5.51% 5.58%
===== =====
</TABLE>
- ---------------
(1) Changes in interest income and expense not due solely to balance or rate
changes are included in the rate category.
(2) Interest income includes fees on loans of $241,000 in 1995 and $232,000 in
1994.
(3) Nonaccrual loans are included in average loan balances and the associated
income (recognized on a cash basis) is included in interest.
(4) The Company did not have significant tax-exempt income in 1995 or 1994.
14
<PAGE> 17
II. INVESTMENT PORTFOLIO
The carrying value of securities at December 31 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
CATEGORY 1996 1995
- -------- ----------- -----------
<S> <C> <C>
Available for sale:
Obligations of U.S. Treasury and other U.S. Agencies........ $ 8,044,342 $ 8,972,545
Mortgage-backed............................................. 5,862,331 2,171,985
Tax exempt.................................................. 460,218 --
Other....................................................... 329,300 --
----------- -----------
Total....................................................... $14,696,191 $11,144,530
=========== ===========
</TABLE>
The following table presents the carrying value by maturity distribution of
the investment portfolio along with weighted average yields thereon as of
December 31, 1996:
<TABLE>
<CAPTION>
WITHIN 1-5 BEYOND
1 YEAR YEARS 5 YEARS TOTAL
---------- ---------- -------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Agencies.................................... $1,496,408 $6,547,934 $ -- $8,044,342
Tax exempt securities............................ -- 148,490 311,728 460,218
---------- ---------- -------- ----------
Total............................................ $1,496,408 $6,696,424 $311,728 $8,504,560
========== ========== ======== ==========
Weighted average yield (tax equivalent basis).... 5.23% 6.67% 7.16% 6.41%
========== ========== ======== ==========
Mortgage-backed and equity securities............ $6,191,631
==========
Weighted average yield........................... 6.46%
==========
</TABLE>
III. LOAN PORTFOLIO
The following table presents various categories of loans contained in the
Bank's loan portfolio for the periods indicated and the total amount of all
loans for such period:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
TYPE OF LOAN 1996 1995
- ------------ ----------- -----------
<S> <C> <C>
Domestic:
Commercial, financial and agricultural.................... $ 9,909,000 $ 7,006,000
Real estate-construction.................................. 2,671,000 2,270,000
Real estate-1 to 4 family residential..................... 22,029,000 18,258,000
Real estate-other......................................... 4,133,000 1,839,000
Consumer loans............................................ 13,212,832 12,960,842
----------- -----------
Total loans....................................... 51,954,832 42,333,842
----------- -----------
Less: unearned interest..................................... (402,000) (402,000)
Allowance for possible loan losses..................... (644,403) (528,000)
----------- -----------
Total (net of allowance).................................... $50,908,429 $41,403,842
=========== ===========
</TABLE>
15
<PAGE> 18
The following is a presentation of an analysis of maturities of loans as of
December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------
DUE IN 1 DUE IN 1 TO DUE AFTER
TYPE OF LOAN YEAR OR LESS 5 YEARS 5 YEARS TOTAL
- ------------ ------------ ----------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural................. $4,712 175 5,022 9,909
Real estate-construction................................ 1,907 16 748 2,671
------ --- ----- ------
Total................................................... $6,619 191 5,770 12,580
====== === ===== ======
</TABLE>
The following is a presentation of an analysis of sensitivities of loans to
changes in interest rates as of December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Loans due after 1 year with predetermined interest rates.... $13,633
Loans due after 1 year with floating interest rates......... $19,175
</TABLE>
The following table presents information regarding nonaccrual, past due and
restructured loans at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Number................................................... 7 1
Amount................................................... $191,000 $ 4,000
Accruing loans (including consumer loans) which are
contractually past due 90 days or more as to principal
and interest payments:
Number................................................... 12 4
Amount................................................... $137,000 $131,000
Loans defined as "troubled debt restructurings"............ 0 0
Number................................................... 0 0
Amount................................................... $ -- $ --
</TABLE>
As of December 31, 1996, there are no loans classified for regulatory
purposes as doubtful or substandard that have not been disclosed in the above
table, which (I) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
Accrual of interest is discontinued on a loan when management of the Bank
determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful.
There are no other loans which are not disclosed above, but where known
information about possible credit problems of borrowers causes management to
have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
16
<PAGE> 19
V. SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Bank's loss experience is furnished in the following
table for the periods indicated, as well as a breakdown of the allowance for
possible loan losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Balance at beginning of period.............................. $528,000 $378,000
Charge-offs:
Commercial................................................ -- (18,600)
Consumer.................................................. (54,843) (22,896)
-------- --------
(54,843) (41,496)
-------- --------
Recoveries.................................................. 10,230 355
Net Charge-offs............................................. (44,613) (41,141)
-------- --------
Additions charged to operations............................. 161,016 191,141
-------- --------
Balance at end of period.................................... $644,403 $528,000
======== ========
Ratio of net charge-offs during the period to average loans
outstanding during the period............................. 0.01% 0.01%
======== ========
</TABLE>
At December 31, 1996 the allowance was allocated as follows:
<TABLE>
<CAPTION>
PERCENT OF LOANS IN EACH
AMOUNT CATEGORY TO TOTAL LOANS
-------- ------------------------
<S> <C> <C>
Commercial, financial and agricultural...................... $240,000 19.2%
Real estate-construction.................................... 37,000 5.2%
Real estate-mortgage........................................ 158,000 50.1%
Consumer loans.............................................. 209,403 25.5%
-------- -----
Total............................................. $644,403 100%
======== =====
</TABLE>
At December 31, 1995 the allowance was allocated as follows:
<TABLE>
<CAPTION>
PERCENT OF LOANS IN EACH
AMOUNT CATEGORY TO TOTAL LOANS
-------- ------------------------
<S> <C> <C>
Commercial, financial and agricultural...................... $200,000 16.5%
Real estate-construction.................................... 30,000 5.3%
Real estate-mortgage........................................ 130,000 47.5%
Consumer loans.............................................. 168,000 30.7%
-------- -----
Total............................................. $528,000 100%
======== =====
</TABLE>
ALLOWANCE FOR LOAN LOSSES
In considering the adequacy of the Company's allowance for loan losses,
management has focused on the fact that as of December 31, 1996, 19% of
outstanding loans are in the category of commercial loans. Commercial loans are
generally considered by management as having greater risk than other categories
of loans in the Company's loan portfolio. However, approximately 90% of these
commercial loans at December 31, 1996 were made on a secured basis. Management
believes that the secured condition of the preponderant portion of its
commercial loan portfolio greatly reduces any risk of loss inherently present in
commercial loans.
The Company's consumer loan portfolio is also well secured, and as such,
does not, in management's opinion involve more than normal credit risk. The same
is true for the Company's real estate mortgage portfolio, approximately 84% of
which is secured by first mortgages on 1-4 family residential properties.
17
<PAGE> 20
Although the Company's loan portfolio is concentrated in upper East
Tennessee, primarily Hawkins County, management does not believe this geographic
concentration presents an abnormally high risk.
V. DEPOSITS
The following tables present, for the periods indicated, the average amount
of and average rate paid on each of the following deposit categories:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
- ---------------- ----------------- -----------------
<S> <C> <C>
Non interest-bearing demand deposits........................ $ 9,371,000 Not Applicable
NOW deposits................................................ $ 8,594,000 2.80%
Savings deposits............................................ $ 8,219,000 2.91%
Time deposits............................................... $30,256,000 5.67%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
- ---------------- ----------------- -----------------
<S> <C> <C>
Non-interest-bearing demand deposits........................ $ 8,008,000 Not Applicable
NOW deposits................................................ $ 8,551,000 2.40%
Savings deposits............................................ $ 7,602,000 2.99%
Time deposits............................................... $21,428,000 5.62%
</TABLE>
The following table indicates amount outstanding of time certificates of
deposit of $100,000 or more and respective maturities for the year ended
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
TIME CERTIFICATES
OF DEPOSITS
-----------------
<S> <C>
3 months or less............................................ $ 5,232
3-12 months................................................. 5,339
over 12 months.............................................. 674
-------
Total....................................................... $11,245
=======
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity for
the periods indicated are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Return on average assets.................................... 1.2% 1.1%
Return on average equity.................................... 10.1% 7.2%
Average equity to average assets ratio...................... 11.6% 14.8%
Dividend payout ratio....................................... 42.6% 32.8%
</TABLE>
18
<PAGE> 21
VII. SHORT-TERM BORROWINGS
The following table summarizes short-term borrowings at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------
1996 1995
------ ------
<S> <C> <C>
Amount outstanding at December 31........................... $3,745 $1,837
Weighted average interest rate at year end.................. 4.00% 3.00%
Maximum month-end balance during the year................... 4,167 3,668
Average amount outstanding during the year.................. 3,204 2,756
Weighted average interest rate during the year.............. 3.90% 2.50%
</TABLE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
19
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Community Corporation:
We have audited the consolidated balance sheets of First Community
Corporation and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Community
Corporation and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
January 24, 1997
/s/ Heathcott & Mullaly
20
<PAGE> 23
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Cash and due from banks $ 3,455,553 $ 2,975,614
Time deposits with other banks 500,000 --
Federal funds sold 13,000 1,558,000
Securities, available for sale 14,696,191 11,144,530
Loans 51,552,832 41,931,842
Allowance for loan losses (644,403) (528,000)
------------ ------------
NET LOANS 50,908,429 41,403,842
------------ ------------
Premises and equipment 2,499,386 2,088,037
Accrued interest receivable 778,508 645,947
Deferred income taxes 135,998 152,636
Other assets 258,977 152,681
------------ ------------
TOTAL ASSETS $ 73,246,032 $ 60,121,287
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 9,085,133 $ 8,713,258
Interest-bearing 48,531,478 40,904,006
------------ ------------
TOTAL DEPOSITS 57,616,611 49,617,264
------------ ------------
Federal funds purchased and securities sold
under agreement to repurchase 4,744,838 1,836,632
Advances from Federal Home Loan Bank 2,000,000 --
Note payable 200,000 --
Accrued interest payable 509,205 380,916
Dividends payable 374,627 198,422
Other liabilities 307,751 115,273
------------ ------------
TOTAL LIABILITIES 65,753,032 52,148,507
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, no par value. Authorized
3,000,000 shares; issued 624,379 shares
in 1996 and 661,407 shares in 1995 6,989,051 7,384,070
Preferred stock, no par value, Authorized
1,000,000 sares; none issued -- --
Retained earnings 469,667 606,063
Unrealized gains (losses) on securities
available for sale, net of taxes 34,282 (17,353)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 7,493,000 7,972,780
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 73,246,032 $ 60,121,287
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $4,753,435 $3,827,235 $2,540,652
Securities:
Taxable 802,845 651,621 525,128
Non-taxable 11,940 -- --
Federal funds sold 161,477 116,864 80,237
---------- ---------- ----------
TOTAL INTEREST INCOME 5,729,697 4,595,720 3,146,017
---------- ---------- ----------
INTEREST EXPENSE
Deposits 2,197,338 1,636,104 968,705
Other 159,575 69,763 2,699
---------- ---------- ----------
TOTAL INTEREST EXPENSE 2,356,913 1,705,867 971,404
---------- ---------- ----------
NET INTEREST INCOME 3,372,784 2,889,853 2,174,613
PROVISION FOR LOAN LOSSES 161,016 191,141 171,842
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,211,768 2,698,712 2,002,771
---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 440,516 265,462 201,554
Credit life insurance commissions 92,702 78,983 86,452
Mortgage banking activities 28,654 -- --
Net securities gains 3,373 -- --
Other 78,279 42,404 32,297
---------- ---------- ----------
TOTAL NONINTEREST INCOME 643,524 386,849 320,303
---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,186,612 973,377 709,795
Occupancy 183,288 152,101 73,672
Furniture and equipment 114,932 98,878 50,858
Data processing fees 208,558 162,562 119,277
Advertising and public relations 48,369 69,875 57,455
Operating supplies 91,428 101,359 107,261
Other operating 616,852 558,636 440,806
---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 2,450,039 2,116,788 1,559,124
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,405,253 968,773 763,950
INCOME TAXES 525,840 363,252 125,266
---------- ---------- ----------
NET INCOME $ 879,413 $ 605,521 $ 638,684
========== ========== ==========
NET INCOME PER SHARE $ 1.30 $ 0.90 $ 1.08
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING 676,634 670,107 590,886
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 25
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
RETAINED GAINS TOTAL
COMMON EARNINGS (LOSSES) ON SHAREHOLDERS'
STOCK (DEFICIT) SECURITIES EQUITY
----------- --------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 4,414,070 (439,720) 1,688 3,976,038
Issuance of 220,000 shares
of common stock 2,970,000 - - 2,970,000
Net income - 638,684 - 638,684
Change in unrealized gains (losses)
on AFS securities, net of taxes - - (43,748) (43,748)
----------- --------- -------- -----------
BALANCE, DECEMBER 31, 1994 $7,384,070 $ 198,964 $ 42,060 $ 7,540,974
Net income - 605,521 - 605,521
Dividends -- $.30 per share - (198,422) - (198,422)
Change in unrealized losses
on AFS securities, net of taxes - - 24,707 24,707
----------- --------- -------- -----------
BALANE, DECEMBER 31, 1995 $ 7,384,070 $ 606,063 $(17,353) $ 7,972,780
Purchase and retirement of
common stock (496,652) (641,182) - (1,137,834)
Issuance of 7,495 shares of
common stock in connection
stock option plans 101,633 - - 101,633
Net income - 879,413 - 879,413
Change in unrealized gains (losses)
on AFS securities, net of taxes - - 51,635 51,635
Dividends -- $.60 per share - (374,627) - (374,627)
----------- --------- -------- -----------
BALANCE, DECEMBER 31, 1996 6,989,051 469,667 34,282 7,493,000
=========== ========= ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH 1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 879,413 $ 605,521 $ 638,684
NET INCOME
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization 172,190 119,514 61,268
Provision for loan losses 161,016 191,141 171,842
Deferred income tax benefit, net of
valuation allowance (15,000) (17,000) (125,000)
Net accretion of investment securities (10,871) (6,174) (42,067)
Increase in accrued interest receivable (132,561) (189,431) (264,439)
Increase in accrued interest payable 128,289 213,022 110,598
Increase (decrease) in other liabilities 192,478 (63,716) 159,299
Other, net (132,811) (109,716) 18,143
--------------- --------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,242,143 743,161 728,328
--------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in federal funds sold 1,545,000 2,887,000 (1,567,000)
Purchases of HTM securities - (3,944,275) (6,845,055)
Proceeds from maturities and redemptions of
HTM securities - 3,677,257 2,497,745
Purchases of AFS securities (14,949,828) - -
Proceeds from maturities and redemptions of
AFS securities 10,491,553 1,500,000 -
Proceeds from sales of AFS securities 1,000,768 - -
Net increase in loans (9,665,603) (11,760,169) (12,261,395)
Purchases of premises and equipment (557,024) (309,519) (878,547)
--------------- --------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (12,135,134) (7,949,706) (19,054,252)
--------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (198,422) - -
Proceeds from note payable 200,000 - -
Proceeds from FHLB advances 2,000,000 - -
Increase in deposits 7,999,347 7,402,117 14,298,614
Increase (decrease) in federal funds
purchased and securities sold
under agreement to repurchase 2,908,206 (93,890) 1,930,522
Purchase and retirement of common stock (1,137,834) - -
Proceeds from issuance of common stock 101,633 - 2,970,000
--------------- --------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,872,930 7,308,227 19,199,136
--------------- --------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 979,939 101,682 873,212
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,975,614 2,873,932 2,000,720
--------------- --------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,955,553 $ 2,975,614 $ 2,873,932
=============== =============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 2,228,624 $ 1,492,845 $ 860,806
Income taxes 486,785 439,513 104,000
=============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
First Community Corporation, through its subsidiary, First Community Bank,
provides a variety of banking services to individuals and businesses from its
two locations in Rogersville and Church Hill, Tennessee. Its primary deposit
products are demand and savings deposits and certificates of deposit, and its
primary lending products are commercial, real estate mortgage and installment
loans. The accounting principles followed and the methods of applying those
principles conform with generally accepted accounting principles and to general
practices in the banking industry. The significant policies are summarized as
follows:
BASIS OF PRESENTATION
First Community Corporation was incorporated on February 18, 1992 for the
purpose of organizing a state-chartered commercial bank. All assets and
liabilities of First Community Corporation were transferred to First Community
Bank of East Tennessee on April 26, 1993, the date the Bank commenced
operations. This business combination has been accounted for as a
pooling-of-interests, and accordingly, the historical financial statements
include the accounts and results of operations of First Community Corporation
during the organizational period. During the organizational period, the
Corporation accumulated a deficit of approximately $294,000. The name of the
original First Community Corporation was changed to Rogersville Corporation in
1993, and Rogersville Corporation was dissolved during that year.
On April 27, 1994, the shareholders of the Bank approved a Share Exchange
Agreement whereby the Bank became a wholly-owned subsidiary of a newly-formed
one-bank holding company, First Community Corporation. Bank shareholders
received one share of First Community Corporation stock for each share of Bank
stock owned. As in the combination described above, this transaction has been
treated as a pooling-of-interests whereby the historical financial statements
include the accounts and results of operations of the Bank and the original
First Community Corporation. All material intercompany balances and transactions
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
Cash and cash equivalents as presented in the statements include cash and
due from banks.
CASH AND DUE FROM BANKS
Included in cash and due from banks are legal reserve requirements which
must be maintained on an average basis in the form of cash and balances due from
the Federal Reserve and other banks.
SECURITIES
Securities are classified into three categories: held to maturity (HTM),
available for sale (AFS), and trading. Securities classified as held to
maturity, which are those the Company has the positive intent and ability to
hold to maturity, are reported at amortized cost. Securities classified as
available for sale may be sold
25
<PAGE> 28
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in response to changes in interest rates, liquidity needs, and for other
purposes. These securities are reported at fair value and include securities not
classified as held to maturity or trading. Trading securities are those held
principally for the purpose of selling in the near future and are carried at
fair value. Unrealized holding gains and losses for available for sale
securities are excluded from earnings and reported, net of any income tax
effect, as a separate component of stockholders' equity. Realized gains and
losses are reported in earnings based on the adjusted cost of the specific
security sold. The Company currently has no held to maturity or trading
securities.
LOANS
Loans which management has the intent and ability to hold for the
foreseeable future are reported at their outstanding principal balance. Interest
on commercial and real estate loans is computed daily based on the principal
amount outstanding. Interest on installment loans is recognized using both the
interest method and a method which approximates the interest method. Loan
origination fees in excess of related direct costs are deferred and recognized
as an adjustment of yield on the interest method.
A loan is considered impaired when it is probable that the Company will be
unable to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or at the fair value of
the collateral if the loan is collateral dependent. If the measure of the
impaired loan is less than the recorded investment in the loan, a creditor shall
recognize an impairment by creating or adjusting a valuation allowance with a
corresponding charge or credit to the provision for loan losses.
The Company considers all loans on non-accrual status to be impaired.
Interest accruals on loans are discontinued when, in the opinion of management,
it is not reasonable to expect that such interest will be collected, or
generally, when collection of principal or interest becomes 90 days or more past
due. Management may make exceptions to this policy when the estimated net
realizable value of the collateral is sufficient to recover the principal and
interest balance. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by charges to operations based
on management's evaluation of the assets, economic conditions and other factors
considered necessary to maintain the allowance at an adequate level. In
evaluating the adequacy of the allowance, management makes certain estimates and
assumptions which are susceptible to change in the near term. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions.
Uncollectible loans are charged to the allowance account in the period such
determination is made. Recoveries on loans previously charged off are credited
to the allowance account in the period received. Allowances for impaired loans
are generally determined based on collateral values or the present value of
estimated cash flows, as discussed above.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation is computed principally on the
straight-line method over the estimated useful lives of the assets, which range
as follows: building-40 years, equipment-5 to 7 years.
26
<PAGE> 29
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER REAL ESTATE
Other real estate, which consists of properties acquired through
foreclosure is recorded at the lower of the outstanding loan amount or fair
value, determined by appraisal, at the date of foreclosure. Declines in value
resulting from reappraisals, as well as losses resulting from disposition are
charged to operations.
STOCK-BASED COMPENSATION
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which is effective for awards
granted in fiscal years beginning after December 31, 1995. The standard defines
a fair value-based method of measuring employee stock options or similar equity
instruments. Under this method, compensation cost is measured at the option
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. In lieu of recording the value of
such options, the Company has elected to continue to measure compensation cost
using APB Opinion 25 and to provide pro forma disclosures quantifying the
difference between compensation cost included in reported net income and the
related cost measured by such fair value-based method.
EARNINGS PER SHARE
Earnings per share is calculated based on the weighted average number of
shares outstanding and common stock equivalents arising from the assumed
exercise of outstanding stock options.
INCOME TAXES
The Company files a consolidated tax return with its subsidiary. Income
taxes are allocated to members of the consolidated group on a separate return
basis. Income taxes have been provided using the liability method as prescribed
by SFAS No. 109, "Accounting for Income Taxes".
EMPLOYEE BENEFITS
The Bank maintains a 401(k) profit-sharing plan which covers substantially
all employees. The Bank does not provide any other pension, post-employment, or
other post-retirement benefits for its employees.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. These fair values are provided for disclosure purposes only and do
not impact carrying values of financial statement amounts.
Short-Term Financial Instruments -- The carrying amounts reported in the
balance sheet for cash and due from banks and federal funds sold approximate
their fair values. The carrying amounts for short-term borrowings, which consist
of federal funds purchased and securities sold under agreements to repurchase,
short-term FHLB advances and notes payable approximate their fair values.
Securities (including mortgage-backed securities) -- Fair values for
securities are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Loans Receivable -- For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality.
27
<PAGE> 30
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deposit Liabilities -- The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The carrying amounts for variable-rate,
fixed-term money market accounts and certificates of deposits approximate their
fair values at the reporting date. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Accrued Interest -- The carrying amounts of accrued interest approximate
their fair values.
Off-Balance Sheet Instruments -- Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings.
(2) SECURITIES
As a result of a Special Report issued in November, 1995 by the FASB, the
Company reassessed its classification of securities and transferred, at fair
value, securities with an amortized cost of $8,942,384 from held to maturity to
available for sale in December, 1995. The unrealized loss at the date of
transfer was approximately $22,000.
The following table reflects the amortized cost and fair values of
securities held at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- ---- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Agencies:
Mortgage-backed............................. $ 5,853,199 $39,347 $30,215 $ 5,862,331
Other....................................... 7,998,300 47,535 1,493 8,044,342
Tax exempt..................................... 460,098 256 136 460,218
Equity securities.............................. 329,300 -- -- 329,300
----------- ------- ------- -----------
Total available for sale............... $14,640,897 $87,138 $31,844 $14,696,191
=========== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
- ---- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasuries................................ $ 2,998,996 $16,496 $ 6,565 $ 3,008,927
U.S. Agencies:
Mortgage-backed............................. 2,174,159 -- 2,174 2,171,985
Other....................................... 5,999,365 2,170 37,917 5,963,618
----------- ------- ------- -----------
Total available for sale............... $11,172,520 $18,666 $46,656 $11,144,530
=========== ======= ======= ===========
</TABLE>
28
<PAGE> 31
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of debt securities at December 31, 1996
by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in 1 year or less....................................... $ 1,496,689 $ 1,496,408
Due after 1 through 5 years................................. 6,650,237 6,696,424
Due after 5 through 10 years................................ 311,472 311,728
Mortgage-backed............................................. 5,853,199 5,862,331
Equity securities........................................... 329,300 329,300
----------- -----------
$14,640,897 $14,696,191
=========== ===========
</TABLE>
During 1996, the Company had gross realized gains from the sale of
securities of $3,373 and no realized losses. There were no realized gains or
losses in 1995 or 1994.
Securities carried at $9,837,000 at December 31, 1996 were pledged to
secure public deposits and for other purposes as required or permitted by law.
At December 31, 1996, the Bank did not hold securities of any single
issuer, other than obligations of the U.S. Government or government agencies,
whose aggregate book value exceeded ten percent of shareholders' equity.
(3) LOANS
A summary of loans outstanding by category at December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commercial, financial and agricultural...................... $ 9,909,000 $ 7,006,000
Real estate -- construction................................. 2,671,000 2,270,000
Real estate -- 1 to 4 family residential properties......... 22,029,000 18,258,000
Real estate -- other........................................ 4,133,000 1,839,000
Consumer.................................................... 13,212,832 12,960,842
----------- -----------
51,954,832 42,333,842
Less unearned interest...................................... (402,000) (402,000)
----------- -----------
Total loans....................................... $51,552,832 $41,931,842
=========== ===========
</TABLE>
At December 31, 1996 and 1995, the Bank had loans amounting to $190,000 and
$4,200, respectively that were specifically classified as impaired. The
allowance for loan losses related to impaired loans amounted to approximately
$25,000 and $1,000 at December 31, 1996 and 1995, respectively. The average
balance of these loans amounted to approximately $100,000, $175,000 and $25,000
for the years ended December 31, 1996, 1995 and 1994, respectively. The amount
of interest income recognized on these loans was not material to the Bank's
results of operations.
Certain parties (principally directors and officers of the Bank, including
their affiliates, families, and companies in which they hold ten percent or more
ownership) were customers of, and had loans and other transactions with the Bank
in the ordinary course of business. The outstanding balances of such loans
totaled $1,464,000 and $1,670,000 as of December 31, 1996 and 1995,
respectively. During 1996, $395,000 of new loans were made and repayments
amounted to $601,000. These loan transactions were made on substantially the
same terms as those prevailing at the time for comparable loans to other
persons. They did not involve more than the normal risk of collectibility or
present other unfavorable features.
29
<PAGE> 32
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in those particular financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL
AMOUNT
-----------
<S> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit.............................. $2,675,000
Standby letters of credit................................. 119,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. All letters of
credit are due within one year or less of the original commitment date. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
The Bank primarily serves customers located in upper East Tennessee. As
such, the Bank's loans, commitments, and standby letters of credit have been
granted to customers in that area. Concentration of credit by type of loan is
presented in Note 3.
In the normal course of business, the Bank is involved in various legal
proceedings. Management has concluded, based upon advice of counsel, that the
result of these proceedings will not have a material effect on the Bank's
financial condition or results of operations.
30
<PAGE> 33
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period.............................. $528,000 $378,000 $223,000
Provision charged to operating expenses................... 161,016 191,141 171,842
Loans charged off......................................... (54,843) (41,496) (16,842)
Recoveries on loans previously charged off................ 10,230 355 --
-------- -------- --------
Balance at end of period.................................... $644,403 $528,000 $378,000
======== ======== ========
</TABLE>
(6) PREMISES AND EQUIPMENT
The provision for depreciation totaled $145,675, $109,106 and $54,113 for
1996, 1995 and 1994, respectively. Following is a summary of premises and
equipment at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land........................................................ $ 438,500 $ 265,500
Buildings................................................... 1,762,396 1,689,677
Furniture and equipment..................................... 508,431 317,498
Construction in progress.................................... 120,372 --
---------- ----------
2,829,699 2,272,675
Less allowance for depreciation and amortization............ 330,313 184,638
---------- ----------
$2,499,386 $2,088,037
========== ==========
</TABLE>
(7) DEPOSITS
A summary of deposits at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Noninterest-bearing demand.................................. $ 9,085,133 $ 8,713,258
Interest-bearing demand..................................... 7,537,919 7,085,686
Savings..................................................... 8,936,210 7,813,217
Certificates of deposit of $100,000 or more................. 11,245,724 6,218,089
Other time.................................................. 20,811,625 19,787,014
----------- -----------
$57,616,611 $49,617,264
=========== ===========
</TABLE>
Interest expense on deposits of $100,000 or more amounted to $557,063 in
1996, $401,363 in 1995 and $202,615 in 1994.
31
<PAGE> 34
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The components of income tax expense for the years ended December 31 were
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current tax provision
Federal................................................... $453,548 $320,858 $210,467
State..................................................... 87,292 59,394 39,799
-------- -------- --------
540,840 380,252 250,266
-------- -------- --------
Deferred (benefit)
Federal................................................... (12,000) (15,000) 35,000
State..................................................... (3,000) (2,000) 6,000
-------- -------- --------
(15,000) (17,000) 41,000
-------- -------- --------
Change in valuation allowance............................... -- -- (166,000)
-------- -------- --------
$525,840 $363,252 $125,266
======== ======== ========
</TABLE>
The reasons for the differences between the statutory federal income tax
rate and the effective tax rate for the years ended December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate....................................... $477,786 $329,383 $259,743
Increase (decrease) resulting from:
Change in valuation allowance............................. -- -- (166,000)
State income tax, net of federal effect................... 55,250 38,095 30,000
Tax exempt interest....................................... (9,965) (5,371) --
Other, net................................................ 2,769 1,145 1,523
-------- -------- --------
$525,840 $363,252 $125,266
======== ======== ========
</TABLE>
The tax effect of each type of temporary difference and carryforward that
give rise to deferred tax assets and liabilities is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax asset:
Provision for loan losses................................. $178,638 $120,003
Organization and start-up costs........................... 27,550 52,108
Unrealized losses on securities........................... -- 10,636
-------- --------
206,188 182,747
-------- --------
Deferred tax liability:
Unrealized gains on securities............................ (21,000) --
Depreciation.............................................. (49,200) (30,111)
-------- --------
(70,200) (30,111)
-------- --------
Net deferred tax asset...................................... $135,988 $152,636
======== ========
</TABLE>
32
<PAGE> 35
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) OTHER BORROWED FUNDS
Information concerning securities sold under agreement to repurchase is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31..................................... $3,744,838 $1,836,632 $1,930,500
Average balance during the year............................ 3,204,000 2,756,000 133,000
Maximum month-end balance during the year.................. $4,167,000 3,668,000 1,930,500
Average interest rate during the year...................... 3.90% 2.50% 2.20%
</TABLE>
The carrying value of securities underlying the agreements was $4,518,500
at December 31, 1996 and $2,902,000 at December 31, 1995. The securities are
held in safekeeping by another financial institution and are pledged to the
holders of the agreements.
The Company has in effect a line of credit with a financial institution of
$1,500,000 which is secured by all the shares of the subsidiary bank. The
interest rate floats with the 30-day LIBOR rate and was 7.51% at December 31,
1996. The line matures on September 30, 1997, and the outstanding balance at
December 31, 1996 was $200,000.
The short-term advances from the Federal Home Loan Bank are collateralized
by a blanket lien security agreement on the residential loan portfolio in the
amount of $3,000,000. The interest rate on the advances was 7.15% at December
31, 1996.
(10) OTHER NONINTEREST EXPENSES
A summary of other noninterest expenses is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Communications.............................................. $ 97,295 $ 81,538 $ 63,128
Legal and professional...................................... 112,320 84,546 42,956
Board and committee fees.................................... 58,200 60,350 48,000
Automated teller machine expense............................ 39,771 63,805 42,024
Other operating............................................. 309,266 268,397 244,698
-------- -------- --------
$616,852 $558,636 $440,806
======== ======== ========
</TABLE>
(11) SHAREHOLDERS' EQUITY
Funds for cash distributions to shareholders and normal operating expenses
of the Company are derived primarily from dividends from the subsidiary bank.
The subsidiary is subject to federal and state statutes and regulations that
impose restrictions on the amount of dividends that can be declared without
prior regulatory approval. At December 31, 1996, approximately $4,600,000 of
retained earnings was available for dividend declaration without prior
regulatory approval.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company's subsidiary bank is required to meet specific
capital adequacy guidelines that involve quantitative measures of a bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Failure to meet minimum capital requirements
can initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a material effect on the Company's
financial condition. The bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. The risk-based guidelines are based on the
assignment of risk weights to assets and off-balance sheet items depending on
the level of credit risk associated with them. In addition to minimum capital
requirements, under the regulatory framework for prompt corrective action,
regulatory agencies have specified certain ratios an institution must
33
<PAGE> 36
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maintain to be considered "undercapitalized", "adequately capitalized", and
"well capitalized". As of December 31, 1996, the most recent notification from
the bank's regulatory authority categorized the bank as "well capitalized".
There are no conditions or events since that notification that management
believes have changed the bank's category.
The bank's capital amounts and ratios at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
REQUIRED
TO BE REQUIRED
ADEQUATELY TO BE WELL BANK'S
CAPITALIZED CAPITALIZED ACTUAL
----------- ----------- ----------
<S> <C> <C> <C>
Amount:
Tier I leverage.......................................... $2,929,000 $3,662,000 $7,584,000
Tier I risk-based........................................ 1,915,000 2,873,000 7,584,000
Total risk-based......................................... 3,831,000 4,789,000 8,183,000
Ratio:
Tier I leverage.......................................... 4.00% 5.00% 10.36%
Tier I risk-based........................................ 4.00% 6.00% 15.84%
Total risk-based......................................... 8.00% 10.00% 17.09%
</TABLE>
(12) STOCK COMPENSATION PLANS
The Company has two stock option plans, the 1994 Stock Option Plan (the
employee plan), and the Outside Directors' Stock Option Plan (the directors'
plan), which are described below. All options expire within ten years from the
date of grant. As discussed in Note 1, the Company will continue to apply APB
Opinion 25 and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for either plan. Had compensation cost
for the plans been determined based on the fair value at the grant date for
awards under those plans consistent with the method of FASB Statement No. 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net income
As reported............................................... $879,413 $605,521
Pro forma................................................. 859,413 591,521
Earnings per share
As reported............................................... $ 1.30 $ 0.90
Pro forma................................................. 1.27 0.88
</TABLE>
In calculating the pro forma disclosures, the fair value of the options
granted is estimated as of the date granted using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants:
dividend yield of 2.0 percent for all years, expected volatility of 11.9 percent
for 1996 and 11.5 percent for 1995, risk free interest rate of 7.0 percent for
all years; and expected lives of 8 years for 1996 and 1995. Pro forma disclosure
is not required for 1994.
1994 Stock Option Plan -- This plan provides for the granting of options to
purchase up to 75,000 shares by officers and key employees of the Company. The
options become exercisable over 3 to 5 years. The per-share exercise price of
the options may not be less than the fair value of a share of common stock on
the date the option is granted.
Outside Directors' Stock Option Plan -- Adopted in 1994, this plan provides
for the granting of options to purchase up to 50,000 shares by non-employee
directors of the Company. In addition to the initial grant of
34
<PAGE> 37
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2,500 per director, each director is granted 500 shares annually at the fair
value of the stock on the date of grant. These options become exercisable over 5
years.
A summary of the status of the Company's stock option plans for the three
years ended December 31, 1996 and the changes during those years is presented
below.
<TABLE>
<CAPTION>
TOTAL OPTION EXERCISABLE AVERAGE
AVAILABLE SHARES OPTIONS EXERCISE
FOR GRANT OUTSTANDING OUTSTANDING PRICE
--------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Options outstanding at December 31, 1993............... -- -- -- $ --
Shares reserved........................................ 125,000 -- -- --
Options granted........................................ (78,000) 78,000 -- 13.50
Options which became exercisable....................... -- -- 33,332 13.50
------- ------ ------ ------
Options outstanding at December 31, 1994............... 47,000 78,000 33,332 13.50
Options granted........................................ (4,000) 4,000 -- 18.00
Options which became exercisable....................... -- -- 14,132 13.50
------- ------ ------ ------
Options outstanding at December 31, 1995............... 43,000 82,000 47,464 13.50
Options granted........................................ (4,000) 4,000 -- 22.00
Options which became exercisable....................... -- -- 14,934 14.20
Options exercised...................................... -- (7,495) (7,495) 13.56
------- ------ ------ ------
Options outstanding at December 31, 1996............... 39,000 78,505 54,903 $13.56
======= ====== ====== ======
</TABLE>
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1996 and 1995 is $5.31 and
$2.97 per share, respectively.
The following table summarizes information about the stock options
outstanding under the Company's plans at December 31, 1996:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING LIFE EXERCISABLE
- ------------------------------------------------------------ ----------- --------- -----------
<S> <C> <C> <C>
13.50....................................................... 70,505 7 years 53,303
18.00....................................................... 4,000 10 years 800
22.00....................................................... 4,000 10 years 800
</TABLE>
(13) RESTRICTED CASH BALANCES
The Company's subsidiary bank is required to maintain reserves, in the form
of cash and due from banks against its deposit liabilities. Aggregate reserves
of $332,000 were required to be maintained to satisfy federal regulatory
requirements at December 31, 1996.
(14) EMPLOYEE BENEFITS
The subsidiary bank's contribution to the 401K plan amounted to $5,916 in
1996, $5,548 in 1995 and $4,548 in 1994.
35
<PAGE> 38
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments as of
December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks................... $ 3,455,553 $ 3,455,553 $ 2,975,614 $ 2,975,614
Time deposits............................. 500,000 500,000 -- --
Federal funds sold........................ 13,000 13,000 1,588,000 1,588,000
Securities................................ 14,696,191 14,696,191 11,144,530 11,144,530
Loans receivable.......................... 51,552,832 51,614,000 41,931,842 41,808,000
Financial liabilities:
Deposits.................................. 57,616,611 57,678,000 49,617,264 49,577,800
Federal funds sold and securities sold
under repurchase agreements............ 4,744,838 4,744,838 1,836,632 1,836,632
Advances from FHLB........................ 2,000,000 2,000,000 -- --
Note payable.............................. 200,000 200,000 -- --
</TABLE>
Off-balance sheet instruments:
<TABLE>
<CAPTION>
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Loan commitments................................ $2,675,000 $ -- $2,336,000 $ --
Letters of credit............................... 119,000 -- 77,300 --
</TABLE>
36
<PAGE> 39
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) PARENT COMPANY FINANCIAL INFORMATION
Following are condensed balance sheets of First Community Corporation
(parent company only) as of December 31, 1996 and 1995 and the related
condensed statements of operations and cash flows for the three years
then ended December 31, 1996.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 116,530 $ --
Investments in subsidiary bank, at equity 7,618,414 7,962,311
Dividend receivable from subsidiary 322,099 198,422
Other assets 10,587 10,469
---------- ----------
TOTAL ASSETS $8,067,627 $8,171,202
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Dividends payable 374,627 198,422
Note payable $ 200,000 $ --
---------- ----------
TOTAL LIABILITIES 574,627 198,422
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, no par value 6,989,051 7,384,070
Preferred stock -- --
Retained earnings 469,667 606,063
Unrealized gains (losses) on securities 34,282 (17,353)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 7,493,000 7,972,780
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $8,067,627 $8,171,202
========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Dividends from subsidiary $1,282,099 $212,070 $ --
EXPENSES:
Amortization of organization costs 3,513 2,719 1,500
Interest 3,751 -- --
Other 4,386 1,020 --
---------- -------- --------
11,650 3,739 1,500
---------- -------- --------
NET INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY 1,270,449 208,331 (1,500)
INCOME TAX BENEFITS 4,500 2,060 --
---------- -------- --------
NET INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY 1,274,949 210,391 (1,500)
UNDISTRIBUTED INCOME OF SUBSIDIARY
(DIVIDENDS IN EXCESS OF EARNINGS) (395,536) 395,130 640,184
---------- -------- --------
NET INCOME $ 879,413 $605,521 $638,684
========== ======== ========
</TABLE>
37
<PAGE> 40
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 879,413 605,521 638,684
Adjustments to reconcile net income to
net cash provided by operating activities:
Effect of subsidiary operations 395,536 (395,130) (640,184)
Increase in dividends receivable (123,677) (198,422) --
Other, net (119) (11,969) 1,500
----------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,151,153 -- --
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase and retirement of common stock (1,137,834) -- --
Proceeds from note payable 200,000 -- --
Dividends paid (198,422) -- --
Issuance of common stock 101,633 -- 2,970,000
Capital contibuted to subsidiary -- -- (2,970,000)
----------- --------- ---------
NET CASH USED BY FINANCING ACTIVITIES (1,034,623) -- --
NET INCREASE IN CASH 116,530 -- --
CASH AT BEGINNING OF YEAR -- -- --
----------- --------- ---------
CASH AT END OF YEAR $ 116,530 -- --
=========== ====== ===========
</TABLE>
38
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent auditors on
any matters of accounting principles or practices or financial statement
disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Information with respect to the directors and executive officers is
incorporated herein by reference to the Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 23, 1997.
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein
by reference to the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 23, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain beneficial
owners and management is incorporated herein by reference to the Proxy Statement
relating to the Annual Meeting of Shareholders to be held April 23, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the Proxy Statement relating to the
Annual Meeting of Shareholders to be held April 23, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits Filed
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
3.1 -- Charter of Registrant (previously filed as Exhibit 3(a) as
part of the Registration Statement on Form S-4 No. 33-75848,
filed March 1, 1994, which exhibit is incorporated herein by
reference).
3.2 -- Bylaws of Registrant (previously filed as Exhibit 3(b) as
part of the Registration Statement No. 33-75848, which
exhibit is incorporated herein by reference).
10.1 -- First Community Corporation 1994 Stock Option Plan
(previously filed as Appendix C to Registration Statement
No. 33-75848, which appendix is incorporated herein by
reference).
10.2 -- First Community Corporation Outside Directors' Stock Option
Plan (previously filed as Appendix D to Registration
Statement No. 33-75848, which appendix is incorporated
herein by reference).
11 -- Statement Regarding Computation of Earnings Per Share
(included in Item 7-Financial Statements).
21 -- Subsidiaries of the Registrant -- The Registrant's sole
subsidiary is "First Community Bank of East Tennessee", a
Tennessee state chartered banking institution.
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K filed during the fourth
quarter of the Registrant's last fiscal year.
39
<PAGE> 42
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST COMMUNITY CORPORATION
(Registrant)
By: /s/ JOHN L. CAMPBELL
------------------------------------
John L. Campbell
Chairman and President (Chief
Executive Officer)
Date: March 22, 1997
-----------------------------------
By: /s/ GEORGE E. BURNETT
------------------------------------
George E. Burnett
Vice President
(Principal Financial Officer)
(Principal Accounting Officer)
Date: March 22, 1997
----------------------------------
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
By: /s/ JOHN L. CAMPBELL
------------------------------------
John L. Campbell
Chairman and President (Chief
Executive Officer)
Date: March 22, 1997
-----------------------------------
By: /s/ WILLIAM J. KRICKBAUM
------------------------------------
William J. Krickbaum
Director
Date: March 22, 1997
-----------------------------------
By: /s/ LELAND A. DAVIS
------------------------------------
Leland A. Davis
Director
Date: March 22, 1997
-----------------------------------
By: /s/ DR. DAVID R. JOHNSON
------------------------------------
Dr. David R. Johnson
Director
Date: March 22, 1997
-----------------------------------
40
<PAGE> 43
By: /s/ SIDNEY K. LAWSON
----------------------------------
Sidney K. Lawson
Director
Date: March 22, 1997
-----------------------------------
By: /s/ MELISSA LANE CAMPBELL
------------------------------------
Melissa Lane Campbell
Director
Date: March 22, 1997
-----------------------------------
By: /s/ KENNETH E. JENKINS
------------------------------------
Kenneth E. Jenkins
Director
Date: March 22, 1997
-----------------------------------
By: /s/ TOMMY W. YOUNG
------------------------------------
Tommy W. Young
Director
Date: March 22, 1997
-----------------------------------
41
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,456
<INT-BEARING-DEPOSITS> 500
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<TOTAL-ASSETS> 73,246
<DEPOSITS> 57,617
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0
0
<COMMON> 6,989
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</TABLE>
