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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1998
Commission File Number 0-25972
FIRST COMMUNITY CORPORATION
(Name of Small Business Issuer in its charter)
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)
(423) 272-5800
(Issuer's telephone number)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(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, 1998 were:
$8,954,949
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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 December 31, 1998, is $19,334,790 for 1,288,986 shares, at an estimated
$15 per share.
As of December 31, 1998, 2,037,195 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 26, 1999,
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
<S> <C> <C>
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 26, 1999.
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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-KSB of First Community Corporation, a
Tennessee corporation (the "Company") contains or incorporates by reference
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the "safe harbors" created thereby. Those statements
include, but may not be limited to, the discussions of the Company's
expectations concerning its future profitability, operating performance, growth
strategy and its assumptions regarding other matters. Also, when any of the
words "believes", "expects", "anticipates", "intends", "estimates", "plans", or
similar terms or expressions, are used in this Annual Report on Form 10-KSB,
forward-looking statements are being made.
You should be aware that, while the Company believes the expectations
reflected in those forward-looking statements are reasonable, they are
inherently subject to risks and uncertainties which could cause the Company's
future results and stockholder values to differ materially from the Company's
expectations. These factors are disclosed in "Management's Discussion and
Analysis of Financial Condition and Results of Operation" set forth herein.
Because of these factors, there can be no assurance that the forward-looking
statements included or incorporated by reference herein will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included or incorporated by reference herein, you
should not regard the inclusion of such information as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved. In addition, the Company does not intend to, and is not obligated to,
update these forward-looking statements after the date of this Annual Report on
Form 10-KSB, even if new information, future events or other circumstances have
made them incorrect or misleading as of any future date.
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, 1998, the Bank has grown to total assets of more
than $104,000,000.
The Bank's primary trade area is Hawkins County, Tennessee, which had a
population of 44,565 according to the 1990 Census. At the end of 1996 (the most
recent information available) the population was 48,388.
Operating as a full service commercial bank, the Bank provides a range
of customary services which include checking, NOW accounts, money market and
savings accounts, certificates of deposit, individual retirement accounts, money
transfers, and safe deposit facilities. Lending services include loans for
business, agriculture, real estate, personal use, home improvements, and
automobiles. In addition, the Bank offers various uninsured, non-deposit
products including annuities and mutual funds, brokerage services, and secondary
market mortgage processing services. 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
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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") which currently insures the depositors of
each member bank to a maximum of $100,000 per depositor. For this protection,
each bank pays a quarterly statutory assessment and is subject to the rules and
regulations of the FDIC.
The Bank has three full-service offices in two communities in Hawkins
County (two in Rogersville and one in Church Hill). An new full-service office
in Rogersville was completed in August, 1998. The additional office increased
customer convenience and product marketability in the east Rogersville area. 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 -- full-time equivalent employees (excluding
maintenance employees) as of December 31, 1998. The Company has no employees who
are not also employed by the Bank. Although the Bank has been in existence only
four 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-five 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 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
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are reviewed by an internal loan officer committee, and a summary report of such
loans is reviewed monthly by the Board of Directors. A report of loan review
findings is presented quarterly to the Bank's Board of Directors.
Investment Policy
The Bank's general investment portfolio policy is to maximize income
consistent with liquidity, asset quality and regulatory constraints and to
maintain assets 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, 1998, the Company had approximately 51 full-time
equivalent employees. The Company is not a party to any collective bargaining
agreement and believes that its employee relations generally are good and
provides for them several employee benefit programs, including a 401(k) plan,
group life and health insurance, an annual bonus program, paid vacations, and
sick leave.
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.
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") under
the Bank Holding Company Act of 1956, as amended. As a bank holding company, the
Company is required to file financial information with the Federal Reserve
periodically and is subject to periodic examination by the Federal Reserve.
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.
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Capital. The Federal Reserve Board and the FDIC have adopted final
risk-based capital guidelines for bank holding companies. The minimum guidelines
for the ratio of total capital ("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, 1998, the Company's risk-based Tier 1 Capital and
risk-based Total Capital ratios were 12.38% and 13.52%, 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,
1998 was 9.51%.
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, 1998 were
approximately $1,800,000. 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 1998, the Company declared a dividend to its shareholders. This
dividend, in the amount of $.25 per share was paid January 7, 1999 to
shareholders of record on December 15, 1998.
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
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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, 1998, 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 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
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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, 1997, 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 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 were assessed to pay the interest due on FICO bonds beginning
January 1, 1997. The Company considers the cost to the Company to be immaterial.
<PAGE> 10
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.
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
<PAGE> 11
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 law. Certain other usury laws affect limited classes of loans, but
the laws referenced above are by far the most significant. Tennessee's general
usury law authorizes a
floating rate of 4% per annum over a statutorily defined base rate and also
allows certain loan charges, 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 an 8,400 square foot one-story brick building owned by the
Company with an additional drive-through facility on property adjacent to the
main office. In addition, the Bank owns and operates a 4,800 square foot branch
facility in Church Hill, Tennessee. The Bank developed an acre of commercial
property adjoining the Church Hill branch and that extra property was sold by
the Bank in February 1998.
During 1997, property with an existing structure was purchased in East
Rogersville. The building was remodeled to house a new operations center which
relocated from the Main Office in November, 1997. Construction was completed in
August, 1998, on a third branch office consisting of a 3,500 square foot
building with a four lane drive-through facility on East Main Street in
Rogersville. The Bank owns additional properties on West Main Street in
Rogersville that will be used for future expansion. The Bank owns an ATM at each
of the Rogersville 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.
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, 1998.
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 1998 and 1997:
<PAGE> 12
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998
First quarter...................................................... 12.33 11.00
Second quarter..................................................... 12.66 12.33
Third quarter...................................................... 13.33 12.66
Fourth quarter..................................................... 15.00 13.33
1997
First quarter...................................................... 9.33 8.66
Second quarter..................................................... 10.00 9.33
Third quarter...................................................... 10.00 10.00
Fourth quarter..................................................... 11.00 10.00
</TABLE>
The most recent trade of the Company's common stock known to the Company
occurred on February 24, 1999 at a price of $15.00 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 January 31, 1999, there were approximately 820 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. The
Company declared a dividend of $.25 per share in 1998, $.22 per share in 1997,
and $.20 per share in 1996.
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. 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, safe deposit facilities, and brokerage services.
FINANCIAL CONDITION
At December 31, 1998 earning assets were $94 million, compared to $80
million at December 31, 1997. This increase is due to a $16 million, or 25%,
increase in loans.
Economic growth in the local market has enabled the Bank to achieve
continued loan growth. Commercial, financial and agricultural loans increased
$4.0 million (26%). In addition, real estate lending increased $8.3 million
(23%) due partially to the vigorous local housing market. Total loans for
December 31, 1998 were 77.6% of total assets compared to 73.1% of assets for
December 31, 1997. Management attributes the increasing trend in loan
composition to their focus on shifting asset mix to improve profitability in
combination with strong loan demand.
FUNDING SOURCES. Management relies upon local area deposits as a stable
source of funding. The Bank had total deposits of $83.5 million as of December
31, 1998, compared to $72.5 million of December 31, 1997. Average 1998 deposits
increased 9.0%, or $6.0 million to $73.5 million from $67.5 million in 1997.
Certificates of
<PAGE> 13
deposit and interest-bearing demand accounts accounted for most of the deposit
growth in 1998 and 1997. During 1998 and 1997, to fund loan growth, management
increased marketing efforts and offered attractive rates for certificates of
deposit. Average 1998 certificates of deposit increased 8%, or $3.0 million to
$42.6 million from $39.6 million in 1997. Average certificate of deposit growth
for 1997 was $9.3 million (31%). The Bank has no brokered deposits.
The deposit base is supplemented with alternative funding sources,
Federal funds purchased and securities sold under agreement to repurchase and
Federal Home Loan Bank (FHLB) advances, to fund loan growth. The average
balances of Federal funds purchased and securities sold under agreement to
repurchase and FHLB advances amounted to $8.4 million, $6.6 million, and $3.9
million for the years ended December 31, 1998, 1997, and 1996, respectively. Due
to the highly competitive local market for deposits, management anticipates the
continued use of alternative funding sources to partially fund loans 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,
1998 were .12% ($104,000) of total loans and foreclosed and repossessed assets,
up from $98,000 at December 31, 1997.
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 $172,000 or .21% of total loans at December 31,
1998, as compared to $79,000 or .12% of total loans at December 31, 1997.
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 1.07% of outstanding loans at December 31,
1998, compared to 1.16% at December 31, 1997. The allowance is 314% of
nonperforming assets as of December 31, 1998 compared with 1747% of at December
31, 1997.
CAPITAL. Management believes that a strong capital position is vital to
continued profitability of the Company because it promotes depositor and
investor confidence and provides a solid foundation for the future growth of the
organization. Shareholders' equity was $9.4 million or 9.07% of total assets at
December 31, 1998, and $8.1 million or 9.14% of total assets at December 31,
1997.
More volatility has been introduced into equity balances with the
approval of Financial Accounting Standard 115, which specifies that investments
which are categorized as available for sale must be periodically marked to
market, with the adjustment included in equity, net of applicable taxes. To
provide maximum flexibility in the management of investment securities, the Bank
elected to categorize all securities as available for sale. Consequently, the
Bank's equity balances are subject to a relatively greater incidence of
volatility. To record the fair value of securities held for sale, shareholders'
equity was increased by $14,233 and by $38,877 at December 31, 1998 and 1997,
respectively.
First Community Bank's earnings performance over the past two years
allowed the board of directors to declare a dividend of $.25 per share in 1998
and $.22 per share in 1997. Additionally, the board of directors develops and
reviews the capital goals of First Community 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 12
to the consolidated financial statements. First Community Bank's capital ratios
substantially exceed regulatory minimums and compare favorably to industry
averages.
<PAGE> 14
LIQUIDITY AND INTEREST RATE RISK
Liquidity management involves planning to meet depositors' and
borrowers' cash flow requirements at a reasonable cost, as well as developing
contingency plans to meet unanticipated funding needs or a loss of funding
sources. Liquidity is immediately available from three major sources: (1) cash
on hand and on deposit at other banks, (2) the outstanding balance of federal
funds sold and (3) the available for sale securities portfolio. In addition, the
Bank has federal fund lines of credit totaling $8 million established with their
correspondent banks and is a member of the Federal Home Loan Bank (FHLB). As a
member of the FHLB, both short and long term advances can be obtained based
primarily upon the level of mortgage financing in the Bank's loan portfolio. The
Bank's current borrowing capacity is approximately $17 million at the FHLB.
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, 1998, the ratio of rate-sensitive assets to rate-sensitive
liabilities maturing or repricing within one year or less is (30%), 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.
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 $ 11,123 $ - $ 11,123 $ - $ - $11,123
Investment securities - - - 335 1,833 3,321
Loans 17,381 6,786 24,167 28,774 21,568 80,898
-------- -------- -------- -------- ------- -------
Total interest-earning assets $ 28,504 $ 6,786 $ 35,290 $ 29,109 $30,943 $95,342
LIABILITIES
Interest-bearing deposits $ 33,213 $ 28,404 $ 61,617 $ 10,888 $ - $72,505
Other term borrowings 1,528 1,000 2,528 1,000 6,000 9,528
-------- -------- -------- -------- ------- -------
Total interest-bearing liabilities $ 34,741 $ 29,404 $ 64,145 $ 11,888 $ 6,000 $82,033
-------- -------- -------- -------- ------- -------
Assets (liability) GAP $ (6,237) $(22,618) $(28,855) $ 17,221 $24,943 $13,309
Cumulative asset (liability)GAP $ (6,237) $(28,855) $(28,855) $(11,634) 13,309 13,309
======== ======== ======== ======== ======= =======
Cumulative as a percentage of
interest-bearing assets (6.5%) (30%) (30%) (12%) 14% 14%
======== ======== ======== ======== ======= =======
</TABLE>
Included in interest-bearing deposits subject to rate change within
three months are NOW, savings, and money market deposits. These types of
deposits historically have not repriced coincidentally with or in the same
proportion as
<PAGE> 15
general market indicators. Therefore, in addition to monitoring the interest
sensitivity position, or gap, which addresses only the magnitude of timing
differences and does not address earnings or market value, management utilizes
an earnings simulation model to prepare, on a regular basis, earnings
projections based on a range of interest rate scenarios to more accurately
evaluate the level of risk involved.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996. The Company
recorded net income in 1998 of $1,157,024, an increase of 10% over 1997 net
income of $1,054,596. Net income for the year ended December 31, 1997 ("1997"),
increased 20% from $879,413 at December 31, 1996 ("1996"). Net income increased
during 1998 and 1997 because of a higher volume of average earning assets
especially in higher yielding loans.
Return on average shareholders' equity for the years ended December 31,
1998, 1997, and 1996 was 13.4%, 13.4%, and 10.1%, respectively. Return on
average assets for the years ended December 31, 1998, 1997, and 1996 was 1.3%,
1.3%, and 1.2%, 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 $102,428 (9.7%) in 1998 and $539,555 (16.0%) in
1997. The increase was attributable to the increase in average earning assets of
$6.5 million (8.5%) in 1998 and $13.1 million (20.8%) in 1997.
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 $212,500, $156,000 and
$161,000 in 1998, 1997 and 1996, respectively. Net chargeoffs to average loans
outstanding was .13% (94,000), .08% (49,000), .09% ($45,000) for 1998, 1997, and
1996, respectively. The allowance for loan losses was 1.07, 1.16%, and 1.25% of
outstanding portfolio loans at December 31, 1998, 1997 and 1996, respectively.
NON-INTEREST INCOME. Non-interest income increased 47.6% in 1998, 37%
in 1997 and 66% in 1996. As a percentage of average assets, non-interest income
was 1.41%, 1.04% and .93% for 1998, 1997 and 1996, respectively. Included in
other income in 1998 is a gain of $175,000 on the sale of land adjoining the
Church Hill office. Service charges on deposit accounts increased $164,264
(30.7%) in 1998, $95,415 (21.7%) in 1997, and $175,054 (66%) in 1996.
Opportunities to improve such fee income are continuously reviewed and weighed
against competitive pressures in the local market.
NON-INTEREST EXPENSES. Non-interest expenses increased $452,594 (15%),
$542,401 (22.1%) and $333,251 (15.7%) in 1998, 1997 and 1996, respectively. The
ratio of noninterest expense as a percentage of average assets was 3.75%, 3.57%
, and 3.55% for 1998, 1997, and 1996, respectively. Salaries and employee
benefits, which comprise almost 50% of total noninterest expense, increased
19.0% in 1998, 23.7% in 1997 and 21.9% in 1996. The ratio of personnel expense
has been relatively constant as a percentage of average total assets and was
1.90% in 1998, 1.77% in 1997, and 1.72% in 1996.
Most other expense categories increased in 1998, 1997 and 1996. These
increases are the result of the Bank's rapid growth, opening of new branches in
1998 and 1995, and costs related to generating other income.
<PAGE> 16
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 37.0% in 1998, 35.9% in 1997 and 37.4% in 1996.
See Note 8 to the consolidated financial statements for additional details of
the Company's income tax provision.
YEAR 2000 COMPLIANCE ISSUES MAY HAVE AN EFFECT ON THE COMPANY. The
Company has completed an assessment of its information technology hardware and
software and believes that both are Year 2000 compliant, although there can be
no assurance that coding errors or other defects will not be discovered in the
future. The Company intends to continue to test for Year 2000 compliance during
the calendar year 1999. In addition, management of the Company is aware of the
risk that the computer and non-information technology systems of third parties,
such as government agencies, commercial banks and other lenders, could have Year
2000 problems that are not remedied.
The failure of the Company, or of these third parties, to remedy their
Year 2000 problems could disrupt the business operations of the Company.
Although the Company cannot control its Year 2000 risks arising in connection
with third parties, the Company has initiated conversations with those third
parties with whom it has important relationships to determine the extent of
their Year 2000 compliance problems.
<PAGE> 17
CONSOLIDATED AVERAGE BALANCE SHEET, NET INTEREST REVENUE AND CHANGES IN
INTEREST INCOME AND INTEREST EXPENSE (1997 & 1996) -- HEATHCOTT & MULLALY
<PAGE> 18
ORATION AND SUBSIDIARY
Sheets, Net interest Revenue and income and Internet 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, 1998 December 31, 1997 1998/1997 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) $ 70,708 9.89% 6,993 59,055 10.11% 5,972 1,178 (157) 1,021
Investment securities (4) 6,802 6.57% 447 14,549 6.28% 913 (486) 20 (466)
Federal funds sold 4,714 5.11% 241 2,159 5.28% 114 135 (8) 127
Total earning assets, net
of allowance for loan losses 82,224 9.34% 7,681 75,763 9.24% 6,999 827 (145) 682
Cash and due from banks 3,834 3,580
Other assets 5,610 3,659
Total assets $ 91,668 83,002
Deposits:
NOW and money market investments 11,267 3.53% 398 8,758 2.84% 249 71 78 149
Savings 8,863 2.97% 263 8,810 2.96% 261 2 0 2
Time deposits $100,000 and over 9,819 6.59% 647 10,973 5.92% 650 (68) 65 (3)
Other time deposits 32,823 5.96% 1,956 28,689 5.60% 1,606 231 119 350
Total interest-bearing
deposits 62,772 5.20% 3,264 57,230 4.83% 2,766 236 262 498
Non interest-bearing demand deposits 10,793 -- -- 10,289 -- -- -- -- --
Total deposits 73,565 4.44% 3,264 67,519 4.10% 2,766 248 262 498
Other borrowings 8,435 4.13% 348 6,618 5.03% 333 91 (76) 15
Total deposits and borrowed
funds 82,000 4.40% 3,612 74,137 4.18% 3,099 339 186 513
Other liabilities 1,010 997
Stockholders' equity 8,658 7,868
Total liabilities and
stockholders' equity $ 91,668 83,002
Net interest income $ 4,069 $ 3,900 488 (331) 169
Net yield on earning assets 4.95% 5.15%
</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 $461,000 in 1998 and
$459,000 in 1997.
(3) Nonaccrual loans are included in average loan balances and the
associated income (recognized on a cash basis) is included in
interest.
(4) Tax-exempt loans and securities are presented on a taxable equivalent
basis.
<PAGE> 19
ORATION AND SUBSIDIARY
Sheets, Net Interest Revenue and income 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, 1997 December 31, 1996 1997/1996 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) $ 59,055 10.11% 5,972 45,939 10.35% 4,753 1,357 (138) 1,219
Investment securities (4) 14,549 6.28% 913 13,655 5.98% 816 53 44 97
Federal funds sold 2,159 5.28% 114 3,096 5.20% 161 (49) 2 (47)
Total earning assets, net
of allowance for loan losses 75,763 9.24% 6,999 62,690 9.14% 5,730 1,361 (92) 1,269
Cash and due from banks 3,580 2,943
Other assets 3,659 3,356
Total assets $ 83,002 68,989
Deposits:
NOW and money market investments 8,758 2.84% 249 8,594 2.80% 241 5 3 8
Savings 8,810 2.96% 261 8,219 2.91% 239 17 5 22
Time deposits $100,000 and over 10,973 5.92% 650 8,444 6.80% 557 167 (74) 93
Other time deposits 28,689 5.60% 1,606 21,812 5.32% 1,160 366 80 446
Total interest-bearing
deposits 57,230 4.83% 2,766 47,069 4.67% 2,197 555 14 569
Non interest-bearing demand deposits 10,289 -- -- 9,371 -- -- -- -- --
Total deposits 67,519 4.10% 2,766 56,440 3.89% 2,197 431 14 569
Other borrowings 6,618 5.03% 333 3,958 4.04% 160 -- 173 173
Total deposits and borrowed
funds 74,137 4.18% 3,099 60,398 3.90% 2,357 431 187 742
Other liabilities 997 596
Stockholders' equity 7,868 7,995
Total liabilities and
stockholders' equity $ 83,002 68,989
Net interest income $ 3,900 $ 3,373 930 (279) 527
Net yield on earning assets 5.15% 5.38%
</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 $459,000 in 1997 and
$418,000 in 1996.
(3) Nonaccrual loans are included in average loan balances and the
associated income (recognized on a cash basis) is included in
interest.
(4) Tax-exempt loans and securities are presented on a taxable equivalent
basis.
<PAGE> 20
II. INVESTMENT PORTFOLIO
The carrying value of securities at December 31 is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
CATEGORY 1998 1997
- -------- ---- ----
<S> <C> <C>
Available for sale:
- ------------------
Obligations of U.S. Treasury and other U.S. Agencies $ - 3,517,452
Mortgage-backed 1,917,901 4,765,188
Tax exempt 480,049 1,561,095
Other 923,200 859,900
---------- ----------
Total $3,321,150 10,703,635
========== ==========
</TABLE>
The following table presents the carrying value by maturity distribution of the
investment portfolio along with weighted average yields thereon as of December
31, 1998:
<TABLE>
<CAPTION>
($ in thousands)
Within 1-5 Beyond
Available for sale: 1 Year Years 5 Years Total
- ------------------ ------ ----- ------- -----
<S> <C> <C> <C> <C>
Tax exempt securities $ - $ 335,466 $ 144,583 $ 480,049
========= =========== ============ =============
Weighted average yield (tax equivalent) - 7.46% 7.69% 7.52%
========= =========== ============ =============
Mortgage-backed and equity securities $ 1,403,249
=============
Weighted average yield 6.52%
=============
</TABLE>
<PAGE> 21
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 1998 1997
------------ ---- ----
<S> <C> <C>
Domestic:
Commercial, financial and $ 19,023,000 $ 14,997,000
agricultural
Real estate-construction 5,660,000 3,482,000
Real estate-1 to 4 family residential 30,074,000 26,667,000
Real estate-other 9,118,000 6,447,000
Consumer loans 17,148,249 13,509,914
------------ ------------
Total loans 81,023,249 65,102,904
------------ ------------
Less: unearned interest (125,000) (260,000)
Allowance for possible loan losses (869,013) (750,828)
------------ ------------
Total (net of allowance) $ 80,029,236 $ 64,092,076
============ ============
</TABLE>
The following is a presentation of an analysis of maturities of loans
as of December 31, 1998:
<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 $ 7,864 11,159 - 19,023
agricultural
Real estate-construction 5,660 - - 5,660
------- ------ ---- ------
Total $13,524 11,159 - 24,683
======= ====== ==== ======
</TABLE>
The following is a presentation of an analysis of sensitivities of loans to
changes in interest rates as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Loans due after 1 year with predetermined interest rates $ 25,771
Loans due after 1 year with floating interest rates $ 33,439
</TABLE>
<PAGE> 22
The following table presents information regarding nonaccrual, past due and
restructured loans at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Number 8 4
Amount $ 95,000 $18,000
Accruing loans (including consumer loans) which are contractually past due 90
days or more as to principal and interest payments:
Number 38 19
Amount $172,000 $79,000
Loans defined as "troubled debt restructurings"
Number 0 3
Amount $ 0 $55,000
</TABLE>
As of December 31, 1998, 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.
<PAGE> 23
IV. 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,
------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Balance at beginning of period $ 750,828 $ 644,403
Charge-offs: Commercial 0 0
Consumer (100,503) (57,916)
--------- ---------
(100,503) (57,916)
--------- ---------
Recoveries 6,188 8,608
Net Charge-offs (94,315) (49,308)
--------- ---------
Additions charged to operations 212,500 155,733
--------- ---------
Balance at end of period $ 869,013 $ 750,828
========= =========
Ratio of net charge-offs during the period to average loans
outstanding during the period 0.13% 0.08%
========= =========
</TABLE>
At December 31, 1998 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 $350,000 23.5%
Real estate-construction 50,000 7.0%
Real estate-mortgage 125,000 48.4%
Consumer loans 344,013 21.1%
-------- -----
Total $869,013 100%
======== =====
</TABLE>
At December 31, 1997 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 $300,000 23.0%
Real estate-construction 50,000 5.4%
Real estate-mortgage 175,000 50.9%
Consumer loans 225,828 20.7%
-------- -----
Total $750,828 100%
======== =====
</TABLE>
<PAGE> 24
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, 1998, 23% 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,
1998 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 81% of which is secured by first mortgages on
1-4 family residential properties.
Although the Company's loan portfolio is concentrated in upper East
Tennessee, primarily Hawkins 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, 1998
-----------------
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
---------------- -------------- -----------------
<S> <C> <C>
Non interest-bearing demand deposits $10,793,000 Not Applicable
NOW deposits $11,267,000 3.53%
Savings deposits $ 8,863,000 2.97%
Time deposits $42,642,000 6.10%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
---------------- -------------- -----------------
<S> <C> <C>
Non-interest-bearing demand deposits $10,291,000 Not Applicable
NOW deposits $ 8,758,000 2.85%
Savings deposits $ 8,810,000 2.97%
Time deposits $39,649,000 5.69%
</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, 1998 (in thousands):
<TABLE>
<CAPTION>
TIME CERTIFICATES OF DEPOSIT
----------------------------
<S> <C>
3 months or less $ 5,770
3-12 months 5,938
over 12 months 932
-------
Total $12,640
=======
</TABLE>
<PAGE> 25
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,
------------------------
1998 1997
---- ----
<S> <C> <C>
Return on average assets 1.3% 1.3%
Return on average equity 13.4% 13.4%
Average equity to average assets ratio 9.4% 9.8%
Dividend payout ratio 44.0% 39.2%
</TABLE>
VII. SHORT-TERM BORROWINGS
The following table summarizes short-term borrowings at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
Amount outstanding at December 31 $1,528 $4,118
Weighted average interest rate at year end 4.42% 4.84%
Maximum month-end balance during the year 5,000 5,219
Average amount outstanding during the year 3,800 4,569
Weighted average interest rate during the year 4.82% 4.78%
</TABLE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Community Corporation and Subsidiary
We have audited the consolidated balance sheets of First Community Corporation
and Subsidiary as of December 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
January 23, 1999
<PAGE> 27
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------- -----------
<S> <C> <C>
Cash and due from banks $ 3,531,939 3,884,277
Interest-bearing deposits 37,794 20,725
Federal funds sold 11,123,000 4,878,000
Securities, available for sale 3,321,150 10,703,635
Loans 80,898,249 64,842,904
Allowance for loan losses (869,013) (750,828)
------------- -----------
NET LOANS 80,029,236 64,092,076
------------- -----------
Premises and equipment 4,152,604 3,385,673
Accrued interest receivable 1,038,833 922,223
Deferred income taxes 122,300 122,200
Cash surrender value of life insurance 443,210 443,470
Other assets 357,993 246,467
------------- -----------
TOTAL ASSETS $ 104,158,059 88,698,746
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing $ 10,956,286 10,913,094
Interest-bearing 72,505,164 61,582,103
------------- -----------
TOTAL DEPOSITS 83,461,450 72,495,197
------------- -----------
Federal funds purchased and securities sold
under agreement to repurchase 1,528,064 4,117,994
Borrowings from Federal Home Loan Bank 8,000,000 2,000,000
Note payable - 250,000
Accrued interest payable 749,256 745,861
Dividends payable 509,300 413,515
Other liabilities 461,182 564,068
------------- -----------
TOTAL LIABILITIES 94,709,252 80,586,635
------------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value. Authorized
1,000,000 shares; none issued - -
Common stock, no par value. Authorized
3,000,000 shares; issued 2,037,195 shares
in 1998 and 1,879,614 shares in 1997 7,745,570 7,031,954
Retained earnings 1,689,004 1,041,280
Accumulated other comprehensive income, net 14,233 38,877
------------- -----------
TOTAL SHAREHOLDERS' EQUITY 9,448,807 8,112,111
------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 104,158,059 88,698,746
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 28
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $6,993,125 5,980,756 4,753,435
Securities:
Taxable 363,302 844,184 802,845
Non-taxable 54,322 75,404 11,940
Federal funds sold 240,876 114,418 161,477
Interest-bearing deposits 2,165 14,243 -
---------- --------- ---------
TOTAL INTEREST INCOME 7,653,790 7,029,005 5,729,697
---------- --------- ---------
INTEREST EXPENSE
Deposits 3,023,223 2,767,037 2,197,338
Other 436,286 349,629 159,575
---------- --------- ---------
TOTAL INTEREST EXPENSE 3,459,509 3,116,666 2,356,913
---------- --------- ---------
NET INTEREST INCOME 4,194,281 3,912,339 3,372,784
PROVISION FOR LOAN LOSSES 212,500 155,733 161,016
---------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,981,781 3,756,606 3,211,768
---------- --------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 700,195 535,931 440,516
Credit life insurance commissions 95,970 150,054 92,702
Mortgage banking activities 171,510 69,332 28,654
Net securities gains 41,697 19,063 3,373
Gain on sale of land 175,000 - -
Other 116,787 107,218 78,279
---------- --------- ---------
TOTAL NONINTEREST INCOME 1,301,159 881,598 643,524
---------- --------- ---------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,744,891 1,467,639 1,186,612
Occupancy 275,911 203,107 183,288
Furniture and equipment 232,888 162,163 114,932
Data processing fees 160,641 197,515 208,558
Advertising and public relations 107,802 55,800 48,369
Operating supplies 163,962 145,747 91,428
Other operating 758,939 760,469 616,852
---------- --------- ---------
TOTAL NONINTEREST EXPENSES 3,445,034 2,992,440 2,450,039
---------- --------- ---------
INCOME BEFORE INCOME TAXES 1,837,906 1,645,764 1,405,253
INCOME TAXES 680,882 591,168 525,840
---------- --------- ---------
NET INCOME $1,157,024 1,054,596 879,413
========== ========= =========
EARNINGS PER COMMON SHARE:
BASIC 0.61 0.56 0.45
DILUTED $ 0.58 0.54 0.43
========== ========= =========
AVERAGE COMMON SHARES OUTSTANDING:
BASIC 1,891,212 1,874,433 1,954,092
DILUTED 1,995,383 1,962,888 2,029,902
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 29
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Three years ended December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Shareholders
Stock Earnings Income Equity
<S> <C> <C> <C> <C>
Balance, 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 22,485 common shares in
connection with stock option plans 101,633 -- -- 101,633
Dividends - $.20 per share -- (374,627) -- (374,627)
Comprehensive income:
Net income -- 879,413 -- 879,413
Change in unrealized gains (losses)
on AFS securities, net of taxes -- -- 53,635 53,635
Less reclassification adjustment, net of
deferred income tax benefit of $1,300 -- -- (2,000) (2,000)
Total comprehensive income 931,048
Balance, December 31, 1996 6,989,051 469,667 34,282 7,493,000
Purchase and retirement of common stock (58,272) (69,468) -- (127,740)
Issuance of 18,261 common shares in
connection with stock option plans 82,175 -- -- 82,175
Issuance of 2,310 common shares 19,000 -- -- 19,000
Dividends - $.22 per share -- (413,515) -- (413,515)
Comprehensive income:
Net income -- 1,054,596 -- 1,054,596
Change in unrealized gains on
AFS securities, net of taxes -- -- 16,095 16,095
Less reclassification adjustment, net of
deferred income tax benefit of $7,600 -- -- (11,500) (11,500)
Total comprehensive income 1,059,191
Balance, December 31, 1997 7,031,954 1,041,280 38,877 8,112,111
Issuance of 157,581 common shares in
connection with stock option plans 713,616 -- -- 713,616
Dividends - $.25 per share -- (509,300) -- (509,300)
Comprehensive income:
Net income -- 1,157,024 -- 1,157,024
Change in unrealized gains on
AFS securities, net of taxes -- -- 356 356
Less reclassification adjustment, net of
deferred income tax benefit of $16,700 -- -- (25,000) (25,000)
Total comprehensive income 1,132,380
Balance, December 31, 1998 $ 7,745,570 1,689,004 14,233 9,448,807
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 30
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH 1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,157,024 1,054,596 879,413
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 318,554 236,439 172,190
Provision for loan losses 212,500 155,733 161,016
Net securities gains (41,697) (19,063) (3,373)
Gain on sale of land (175,000) - -
Deferred income taxes (benefit) 16,000 10,000 (15,000)
Increase in accrued interest receivable (116,610) (143,715) (132,561)
Increase in accrued interest payable 3,395 236,656 128,289
Increase (decrease) in other liabilities (68,187) 291,117 192,478
Other, net (186,715) (62,585) (130,089)
------------ ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,119,264 1,759,178 1,252,363
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest bearing deposits (17,069) 479,275 (500,000)
Decrease (increase) in federal funds sold (6,245,000) (4,865,000) 1,545,000
Purchases of securities available for sale (2,500,000) (2,050,000) (14,949,828)
Proceeds from maturities and redemptions of
securities available for sale 6,761,485 3,992,556 10,491,553
Proceeds from sales of securities available for sale 3,121,000 2,019,000 1,000,768
Net increase in loans (16,149,660) (13,290,072) (9,665,603)
Investment in life insurance contracts - (433,250) (10,220)
Proceeds from sale of land 225,000 - -
Purchases of premises and equipment (1,093,783) (1,083,513) (557,024)
------------ ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (15,898,027) (15,231,004) (12,645,354)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (413,515) (374,627) (198,422)
Proceeds from (repayments of) note payable (250,000) 50,000 200,000
Proceeds from FHLB advances 6,000,000 - 2,000,000
Increase in deposits 10,966,253 14,878,586 7,999,347
Increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase (2,589,929) (626,844) 2,908,206
Purchase and retirement of common stock - (127,740) (1,137,834)
Proceeds from issuance of common stock 713,616 101,175 101,633
------------ ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,426,425 13,900,550 11,872,930
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (352,338) 428,724 479,939
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,884,277 3,455,553 2,975,614
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,531,939 3,884,277 3,455,553
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 3,456,114 2,880,010 2,228,624
Income taxes 950,407 456,700 486,785
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 31
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
First Community Corporation, through its subsidiary, First Community
Bank, provides a variety of banking services to individuals and
businesses from its banking offices in Rogersville 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
The accompanying consolidated financial statements include the accounts
of First Community Corporation (the Company), a one-bank holding
company and its wholly-owned subsidiary First Community Bank of East
Tennessee (the Bank). 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,
available for sale, 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 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. The Company currently has no held to maturity or
trading securities.
Unrealized holding gains and losses for available-for-sale securities
are reported in other comprehensive income. Realized gains (losses) on
securities available-for-sale are included in other income (expense)
and, when applicable, are reported as a reclassification adjustment,
net of tax, in other comprehensive income. Gains and losses on sales of
securities are determined on the specific-identification method.
<PAGE> 32
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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, the Company recognizes
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 accrual 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.
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.
<PAGE> 33
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
PER SHARE AMOUNTS
Earnings per share (EPS) is calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, issued in February,
1997. The statement requires the dual presentation of basic and diluted
EPS on the income statement. Basic EPS excludes dilution, and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or contracts to issue common stock were exercised or
converted into common stock that then shared in the earnings of the
entity. All prior period EPS data has been restated to reflect
implementation of this statement.
TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
Effective January 1, 1997, the Company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The statement, which supersedes SFAS
No. 122, provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales
from transfers of assets that are secured borrowings. The adoption of
SFAS 125 did not have a material effect on the Company's financial
position or results of operations.
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.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting comprehensive income.
Comprehensive income includes net income and other comprehensive income
which is defined as non-owner related transactions in equity.
<PAGE> 34
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECLASSIFICATIONS
Certain amounts have been reclassified in the previous years' financial
statements to conform with the current year's classifications.
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.
Deposit Liabilities - The fair values disclosed for demand deposits are
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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheets and measure those instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of the provisions of this
statement is not expected to have a material impact on the Company's
financial statements.
<PAGE> 35
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) SECURITIES
The following table reflects the amortized cost and fair values of
securities available for sale held at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1998 COST GAINS LOSSES VALUE
---- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Agencies:
Mortgage-backed $ 1,913,351 4,550 -- 1,917,901
Tax exempt 461,655 18,394 -- 480,049
Equity securities 923,200 -- 923,200
-------------------------------------------------------------------
Total available for sale $ 3,298,206 22,944 -- 3,321,150
===================================================================
1997
----
-------------------------------------------------------------------
U.S. Agencies:
Mortgage-backed $ 4,769,737 8,814 13,363 4,765,188
Other 3,500,455 16,997 -- 3,517,452
Tax exempt 1,510,876 50,219 -- 1,561,095
Equity securities 859,900 -- -- 859,900
-------------------------------------------------------------------
Total available for sale $10,640,968 76,030 13,363 10,703,635
===================================================================
</TABLE>
The amortized cost and fair value of securities at December 31, 1998 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 after 1 through 5 years $ 322,875 335,466
Due after 5 through 10 years 138,779 144,583
Mortgage-backed 1,913,351 1,917,901
Equity securities 923,200 923,200
-----------------------------
$3,298,206 3,321,150
=============================
</TABLE>
The Company had gross realized gains from the sale of securities of
$47,250, $19,063, and $3,373 in 1998, 1997, and 1996, respectively, and
gross realized losses of $5,553 in 1998 and no realized losses in 1997
or 1996.
Securities carried at $2,375,000 at December 31, 1998 were pledged to
secure public deposits and for other purposes as required or permitted
by law. Included in that amount is $2,314,000 of securities pledged to
holders of securities sold under agreement to repurchase (see note 9).
<PAGE> 36
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS
A summary of loans outstanding by category at December 31, 1998 and
1997 follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 19,023,000 14,997,000
Real estate - construction 5,660,000 3,482,000
Real estate - 1 to 4 family residential properties 30,074,000 26,667,000
Real estate - other 9,118,000 6,447,000
Consumer 17,148,249 13,509,904
--------------------------------
81,023,249 65,102,904
Less unearned interest (125,000) (260,000)
--------------------------------
Total loans $ 80,898,249 64,842,904
================================
</TABLE>
At December 31, 1998 and 1997, the Bank had loans amounting to $95,000
and $19,000, respectively that were specifically classified as
impaired. The allowance for loan losses related to impaired loans
amounted to approximately $20,000 and $3,000 at December 31, 1998 and
1997, respectively. The average balance of these loans amounted to
approximately $30,000, $95,000 and $100,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The impact on net
interest income of 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 $2,695,000 and
$1,859,000 as of December 31, 1998 and 1997, respectively. During 1998,
$3,305,000 of new loans were made and repayments amounted to
$2,469,000. 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.
(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.
<PAGE> 37
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) COMMITMENTS AND CONTINGENCIES, CONTINUED
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL
AMOUNT
-------------
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Commitment to extend credit $ 2,212,000
Standby letters of credit 75,435
</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.
(5) ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 750,828 644,403 528,000
Provision charged to operating expenses 212,500 155,733 161,016
Loans charged off (100,503) (57,916) (54,843)
Recoveries on loans previously charged off 6,188 8,608 10,230
-----------------------------------------
Balance at end of period $ 869,013 750,828 644,403
=========================================
</TABLE>
<PAGE> 38
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) PREMISES AND EQUIPMENT
The provision for depreciation totaled $276,852, $197,226 and $145,675
for 1998, 1997 and 1996, respectively. Following is a summary of
premises and equipment at December 31:
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Land $ 707,667 744,500
Building 3,094,319 2,240,980
Furniture and equipment 1,154,324 879,681
Construction in progress -- 48,052
-----------------------------
4,956,310 3,913,213
Less allowance for depreciation and amortization 803,706 527,540
-----------------------------
$4,152,604 3,385,673
=============================
</TABLE>
During 1998, the Bank sold a vacant lot adjacent to the Church Hill
office for a gain of $175,000.
(7) DEPOSITS
A summary of deposits at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Non-interest-bearing demand $10,956,286 10,913,094
Interest-bearing demand 13,849,865 9,447,153
Savings 9,016,122 8,761,116
Certificates of deposit of $100,000 or more 12,640,474 10,336,720
Other time 36,998,703 33,037,114
------------------------------
$83,461,450 72,495,197
==============================
</TABLE>
Interest expense on deposits of $100,000 or more amounted to $555,835
in 1998, $649,822 in 1997 and $557,063 in 1996.
<PAGE> 39
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>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Current tax provision
Federal $556,082 480,368 453,548
State 108,800 100,800 87,292
-------------------------------------------
664,882 581,168 540,840
-------------------------------------------
Deferred (benefit)
Federal 14,000 8,000 (12,000)
State 2,000 2,000 (3,000)
-------------------------------------------
16,000 10,000 (15,000)
-------------------------------------------
$680,882 591,168 525,840
===========================================
</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>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $625,018 559,560 477,786
Increase (decrease) resulting from:
State income tax, net of federal effect 73,000 67,400 55,250
Tax exempt interest (25,600) (32,100) (9,965)
Other, net 8,464 (3,692) 2,769
-------------------------------------------
$680,882 591,168 525,840
===========================================
</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>
1998 1997
---------------------------
<S> <C> <C>
Deferred tax asset:
Provision for loan losses $ 286,000 234,000
Organization and start-up costs -- 5,000
---------------------------
286,000 239,000
---------------------------
Deferred tax liability:
Unrealized gains on securities (8,700) (24,800)
Stock dividends (48,000) (21,800)
Depreciation (107,000) (70,200)
(163,700) (116,800)
---------------------------
Net deferred tax asset $ 122,300 122,200
===========================
</TABLE>
<PAGE> 40
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>
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Balance at December 31 $1,528,064 4,117,994 3,744,838
Average balance during the year 3,800,000 4,568,730 3,204,000
Maximum month-end balance during the
year 5,000,000 5,218,728 4,167,000
Average interest rate during the year 4.82% 4.78% 3.90%
</TABLE>
The carrying value of securities underlying the agreements was
$2,314,000 at December 31,1998 and $6,388,500 at December 31, 1997. 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 6.96%
at December 31, 1998. The line matures on September 30, 1999, and the
outstanding balance was $0 and $250,000 at December 31, 1998 and 1997,
respectively.
The Bank obtains various short-term and long-term advances from the
Federal Home Loan Bank of Cincinnati (FHLB) under Blanket Agreements
for Advances and Security Agreements (Agreements). The Agreements
entitle the Bank to borrow funds from the FHLB to fund mortgage loan
programs and satisfy other funding needs. Fixed rate advances at
December 31, 1998 totaled $8 million with $1 million at 6.15% maturing
in 1999, $1 million at 6.19% maturing in 2000, $3 million at 5.08%
maturing in 2008, and $3 million at 4.25% maturing in 2008. In
addition, the Bank had stand-by letters of credit from the FHLB of $6
million which were used to collateralize public deposits. At December
31, 1998, the Bank had a total borrowing capacity at the FHLB of $18.5
million, of which $4.5 million was undrawn and available. The FHLB
advances and the letters of credit are collateralized by the Bank's
FHLB stock with a carrying value of $923,200 and certain single-family
mortgage loans totaling $21 million.
(10) OTHER NONINTEREST EXPENSES
A summary of other operating expenses included in noninterest expenses
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Communications $124,711 117,481 97,295
Legal and professional 116,619 134,503 112,320
Board and committee fees 57,150 57,775 58,200
Other operating 460,459 450,710 349,037
----------------------------------------------
$758,939 760,469 616,852
==============================================
</TABLE>
<PAGE> 41
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) SHAREHOLDERS' EQUITY
The Company's charter authorizes 1,000,000 shares of preferred stock,
no par value. Shares of the preferred stock may be issued from time to
time in one or more series, each such series to be so designated as to
distinguish the shares thereof from the shares of all other series and
classes. The board of directors has the authority to divide any or all
classes of preferred stock and to fix and determine the relative rights
and preferences of the shares of any series so established. The board
currently has no intent to issue such preferred stock.
The Company's charter authorizes 3,000,000 shares of common stock, no
par value, with 2,037,195 shares outstanding at December 31, 1998.
In November, 1998, the Company's board of directors declared a
three-for-one split of the Company's common stock, effected by a
distribution of two shares for each share held of record at the close
of business on November 10, 1998. All references in the consolidated
financial statements to shares and related prices, average number of
shares, per share amounts and stock plan data have been adjusted to
reflect the split.
(12) REGULATORY MATTERS
The Company's subsidiary bank is required to maintain reserves, in the
form of cash and due from banks against its deposit liabilities. The
requirement was satisfied by teller and vault cash at December 31,
1998.
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, 1998, approximately $1,800,000 of retained earnings was
available for dividend declaration by the subsidiary 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 maintain to be considered
"undercapitalized", "adequately capitalized", and "well capitalized".
As of December 31, 1998, 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.
<PAGE> 42
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) REGULATORY MATTERS, CONTINUED
The bank's capital amounts and ratios at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
REQUIRED
TO BE REQUIRED
ADEQUATELY TO BE WELL BANK'S
CAPITALIZED CAPITALIZED ACTUAL
-------------------------------------------------
<S> <C> <C> <C>
Amount:
Tier I leverage $ 4,000,000 4,950,000 9,168,000
Tier I risk-based 3,048,000 4,572,000 9,168,000
Total risk-based 6,096,000 7,620,000 10,037,000
Ratio:
Tier I leverage 4.00% 5.00% 9.24%
Tier I risk-based 4.00% 6.00% 12.03%
Total risk-based 8.00% 10.00% 13.17%
<CAPTION>
1997
-------------------------------------------------
<S> <C> <C> <C>
Amount:
Tier I leverage $ 3,488,000 4,360,000 7,988,000
Tier I risk-based 2,417,000 3,625,000 7,988,000
Total risk-based 4,833,000 6,041,000 8,739,000
Ratio:
Tier I leverage 4.00% 5.00% 9.16%
Tier I risk-based 4.00% 6.00% 13.22%
Total risk-based 8.00% 10.00% 14.47%
</TABLE>
(13) 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 would not have been materially affected in 1998,
1997 or 1996.
1994 Stock Option Plan - This plan provides for the granting of options
to purchase up to 225,000 shares by officers and key employees of the
Company. The options become exercisable over 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.
<PAGE> 43
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) STOCK COMPENSATION PLANS, CONTINUED
Outside Directors' Stock Option Plan - Adopted in 1994, this plan
provides for the granting of options to purchase up to 150,000 shares
by non-employee directors of the Company. In addition to the initial
grant of 7,500 per director, each director is granted 1,500 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, 1998 and the changes during those years
is presented below.
<TABLE>
<CAPTION>
TOTAL OPTION EXERCISABLE AVERAGE
SHARES OPTIONS EXERCISE
OUTSTANDING OUTSTANDING PRICE
---------------------------------------------
<S> <C> <C> <C>
Options outstanding at
December 31, 1996 240,327 134,325 4.50
Options granted 12,000 -- 7.33
Options which became exercisable -- 44,202 4.73
Options forfeited (6,600)
Options exercised (22,485) (22,485) 4.52
---------------------------------------------
Options outstanding at
December 31, 1997 223,242 156,042 4.50
Options granted 10,500 -- 9.33
Options which became exercisable -- 27,300 4.87
Options exercised (18,261) (18,261) 4.50
---------------------------------------------
215,481 165,081 4.52
Options granted 10,500 -- 12.67
Options which became exercisable -- 29,400 5.15
Options exercised (157,581) (157,581) 4.53
---------------------------------------------
Options outstanding at
December 31, 1998 68,400 36,900 5.30
=============================================
</TABLE>
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1998, 1997 and 1996
is $3.31, $1.08 and $1.77 per share, respectively.
The effect of these options on earnings per common share was to
increase average shares outstanding by 104,171 in 1998, 88,455 in 1997,
and 75,810 in 1996.
The following table summarizes information about the stock options
outstanding under the Company's plans at December 31, 1998:
<PAGE> 44
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) STOCK COMPENSATION PLANS, CONTINUED
<TABLE>
<CAPTION>
EXERCISE NUMBER AVERAGE NUMBER
PRICE OUTSTANDING REMAINING LIFE EXERCISABLE
------------------------------------------------------------
<S> <C> <C> <C>
4.50 27,300 5 years 26,100
6.00 9,900 7 years 5,400
7.33 10,200 8 years 3,600
9.33 10,500 9 years 1,800
12.67 10,500 10 years --
</TABLE>
(14) EMPLOYEE BENEFITS
The subsidiary bank's contribution to the 401K plan amounted to $8,637
in 1998, $5,234 in 1997 and $5,916 in 1996.
The Company has a non-qualified deferred compensation arrangement with
an employee under which future defined benefits are funded principally
by a single-premium life insurance policy. An actuarially determined
charge, which is included in non-interest expense, is made each year
based on the future benefits to be paid to the employee (or
beneficiary) under the plan. Total amounts paid or accrued under such
arrangements, which are not deductible by the Corporation for tax
purposes until distributions are made to participants, amounted to
$17,000 in 1998 and $0 in 1997.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments as of
December 31 follows:
<TABLE>
<CAPTION>
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 3,531,939 3,531,939 3,884,277 3,884,277
Time deposits 37,794 37,794 20,275 20,725
Federal funds sold 11,123,000 11,123,000 4,878,000 4,878,000
Securities 3,321,150 3,321,150 10,703,635 10,703,635
Loans receivable 80,898,249 81,232,400 64,842,904 65,007,000
Financial liabilities:
Deposits 83,461,450 83,793,400 72,495,197 72,527,000
Federal funds sold and securities
sold under repurchase
agreements 1,528,064 1,528,000 4,227,994 4,117,994
Advances from FHLB 8,000,000 8,000,000 2,000,000 2,000,000
Note payable -- -- 250,000 250,000
</TABLE>
<PAGE> 45
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
<TABLE>
<CAPTION>
Off-balance sheet instruments:
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------------------------------
<S> <C> <C> <C> <C>
Loan commitments 2,212,000 -- 1,587,000 --
Letters of credit 75,435 -- 91,000 --
</TABLE>
(16) YEAR 2000 ISSUES
The approach of the year 2000 presents problems to computer users such
as the Company. Many computer systems in use today, particularly older
computers and computer programs, may not be able to properly interpret
dates after December 31, 1999 because they use only two digits to
indicate the year in a date. For example, the year 2000 could be
interpreted as the year 1900 by such systems. As a result, the systems
could produce inaccurate data, or not function at all.
In anticipation of this potential problem, the Company has developed a
comprehensive plan to ensure that all of its systems are able to
properly deal with the year 2000. The Company is currently testing the
ability of each system to properly perform, and is implementing
corrective measures when deficiencies are found. At this point, the
Company anticipates no difficulty in achieving full year 2000
capability and does not expect the costs of achieving full capability
to be material.
As a financial institution, the Company is also exposed to potential
risk if borrowers and depositors suffer year 2000 related difficulties
and are unable to repay their loans or maintain their deposit balances.
The Company has performed an assessment of the year 2000 readiness of
significant borrowers and depositors. At this time, the Company is
unable to determine what impact, if any, the year 2000 will have on
either the loan payment performance of borrowers or the balances of key
depositors. Thus far, however, none of the Company's borrowers or
depositors have reported the expectation of material adverse impacts as
a result of the year 2000.
<PAGE> 46
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16)PARENT COMPANY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 43,227 116,530
Investment in subsidiary bank, at equity 8,026,814 7,618,411
Dividend receivable from subsidiary 670,000 322,099
Other assets 35,585 10,587
---------- ---------
TOTAL ASSETS $8,775,626 7,951,097
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 413,515 374,627
Note payable 250,000 200,000
---------- ---------
TOTAL LIABILITIES 663,515 574,627
---------- ---------
SHAREHOLDERS' EQUITY 8,112,111 7,493,000
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,775,626 8,067,627
========== =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Dividends from subsidiary $ 670,000 1,282,099 212,070
EXPENSES:
Amortization of organization costs 4,000 3,513 2,719
Interest 17,068 3,751 -
Other 27,142 4,386 1,020
---------- ---------- -------
48,210 11,650 3,739
---------- ---------- -------
NET INCOME BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 621,790 1,270,449 208,331
INCOME TAX BENEFITS 28,999 4,500 2,060
---------- ---------- -------
NET INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY 650,789 1,274,949 210,391
UNDISTRIBUTED INCOME OF SUBSIDIARY
(DIVIDENDS IN EXCESS OF EARNINGS) 403,807 (395,536) 395,130
---------- ---------- -------
NET INCOME $1,054,596 879,413 605,521
========== ========== =======
</TABLE>
(16)PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,054,596 879,413 605,521
Adjustments to reconcile net income to
net cash provided by operating activities:
Effect of subsidiary operations (403,807) 395,536 (395,130)
Increase in dividends receivable (347,901) (123,677) (198,422)
Other, net (24,999) (119) (11,969)
----------- ---------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 277,889 1,151,153 -
----------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase and retirement of common stock (127,740) (1,137,834) -
Proceeds from note payable 50,000 200,000 -
Dividends paid (374,627) (198,422) -
Issuance of common stock 101,175 101,633 -
----------- ---------- --------
NET CASH USED BY FINANCING ACTIVITIES (351,192) (1,034,623) -
----------- ---------- --------
NET INCREASE (DECREASE) IN CASH (73,303) 116,530 -
CASH AT BEGINNING OF YEAR 116,530 - -
----------- ---------- --------
CASH AT END OF YEAR $ 43,227 116,530 -
=========== ========== ========
</TABLE>
<PAGE> 47
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 21, 1999.
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 21, 1999.
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
21, 1999.
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 21, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits Filed
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <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).
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
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.
<PAGE> 49
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 10, 1999
---------------------------------
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 10, 1999
---------------------------------
By: /s/ William J. Krickbaum
-----------------------------------
William J. Krickbaum
Director
Date: March 10, 1999
---------------------------------
By: /s/ Leland A. Davis
-----------------------------------
Leland A. Davis
Director
Date: March 10, 1999
---------------------------------
By: /s/ Dr. David R. Johnson
-----------------------------------
Dr. David R. Johnson
Director
Date: March 10, 1999
---------------------------------
<PAGE> 50
By: /s/ Sidney K. Lawson
-----------------------------------
Sidney K. Lawson
Director
Date: March 10, 1999
---------------------------------
By: /s/ Melissa Lane Campbell
-----------------------------------
Melissa Lane Campbell
Director
Date: March 10, 1999
---------------------------------
By: /s/ Kenneth E. Jenkins
-----------------------------------
Kenneth E. Jenkins
Director
Date: March 10, 1999
---------------------------------
By: /s/ Tommy W. Young
-----------------------------------
Tommy W. Young
Director
Date: March 10, 1999
---------------------------------
By: /s/ Mark A. Gamble
-----------------------------------
Mark A. Gamble
Executive Vice President
Director
Date: March 10, 1999
---------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,532
<INT-BEARING-DEPOSITS> 38
<FED-FUNDS-SOLD> 11,123
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,321
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 80,898
<ALLOWANCE> 869
<TOTAL-ASSETS> 104,158
<DEPOSITS> 83,461
<SHORT-TERM> 9,528
<LIABILITIES-OTHER> 1,720
<LONG-TERM> 0
0
0
<COMMON> 7,746
<OTHER-SE> 1,703
<TOTAL-LIABILITIES-AND-EQUITY> 104,158
<INTEREST-LOAN> 6,993
<INTEREST-INVEST> 418
<INTEREST-OTHER> 243
<INTEREST-TOTAL> 7,654
<INTEREST-DEPOSIT> 3,023
<INTEREST-EXPENSE> 3,460
<INTEREST-INCOME-NET> 4,194
<LOAN-LOSSES> 213
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 3,445
<INCOME-PRETAX> 1,838
<INCOME-PRE-EXTRAORDINARY> 1,838
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,157
<EPS-PRIMARY> .61
<EPS-DILUTED> .58
<YIELD-ACTUAL> 4.95
<LOANS-NON> 95
<LOANS-PAST> 172
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 751
<CHARGE-OFFS> 100
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 869
<ALLOWANCE-DOMESTIC> 869
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
