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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934 (NoFee required)
For the fiscal year ended December 31, 1997
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OR
Transition Report under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 (No fee required)
For the transition period from to
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Commission file no. 33-86258
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First Community Corporation
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(Name of Small Business Issuer in Its Charter)
South Carolina 57-1010751
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
5455 Sunset Blvd., Lexington, South Carolina 29072
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(Address of Principal Executive Offices) (Zip Code)
(803) 951-2265
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Issuer's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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 aggregate market value of the voting stock as of March 4, 1998,
held by non-affiliates of the registrant based on the book value per share on
December 31, 1997, was $4,151,541.
The issuer's revenues for its most recent fiscal year were $3,456,109.
689,677 shares of the Issuer's common stock were issued and outstanding as of
March 4, 1998.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement for its May
20, 1998 Annual Meeting of Shareholders, are incorporated by reference into
Part III thereof.
Transitional Small Business Disclosure Format. (Check one): Yes No X
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PART I
ITEM 1. BUSINESS.
GENERAL
First Community Corporation (the "Company") was incorporated as a South
Carolina corporation on November 2, 1994, primarily to own and control all of
the capital stock of First Community Bank, N.A. (the "Bank"). The Company
presently engages in no business other than owning and managing the Bank. The
Bank is a national banking association which engages in a commercial banking
business from its main office in Lexington, South Carolina and a second office
located in Richland County, South Carolina. The Bank's deposits are insured by
the Federal Deposit Insurance Corporation (the "FDIC"), and it is a member of
the Federal Reserve System.
In July 1995, the Company completed its initial public offering of
688,077 shares of its common stock, par value $1.00 per share (the "Common
Stock"), at a price of $10.00 per share, pursuant to its Prospectus dated
January 14, 1995. On August 17, 1995, the Bank opened for business.
LOCATION AND SERVICE AREA
The Bank is engaged in general commercial and retail banking business,
emphasizing the needs of small-to-medium sized businesses, professional concerns
and individuals, primarily in Columbia, South Carolina and the surrounding area,
including Lexington and Richland Counties. The Bank has its Main Office
located in the city of Lexington, South Carolina in Lexington County and a
Branch Office located in the city of Forest Acres, South Carolina in Richland
County. See "Facilities."
The Main Office primarily serves the area in and around Lexington,
South Carolina, which is west of Columbia in Lexington County. The Branch
Office primarily serves the area around Forest Acres, South Carolina, which is
east of Columbia in Richland County.
Lexington County and Richland County are located in the geographic
center of the state of South Carolina. Columbia, the capital of South
Carolina, is located within and divided between these two counties. Columbia
can be reached via three interstate highways: I-20, I-26, and I-77. Columbia
is served by several airlines as well as by passenger and freight rail service.
The Columbia, South Carolina Metropolitan Statistical Area, which includes the
projected service areas for both sites of the Bank, had an estimated population
in 1990 of 472,800 according to the South Carolina Division of Research and
Statistical Services. Lexington County had a population of 167,711 and
Richland County had a population of 285,720. Columbia is home to the
University of South Carolina, Benedict College, Allen University, and the Fort
Jackson Army base. The largest employers in the area are the state, local, and
federal governments, followed by Fort Jackson and the University of South
Carolina. Much of the commercial business in the area is in support of these
agencies, including legal and medical services. The principal components of
the economy of the Columbia Area are the government, service industries,
manufacturing, and wholesale and retail trade. Major employers located in the
area include Pirelli Cable, Michelin, the South Carolina state government, and
the Mid-Carolina Electrical Cooperative. The area has experienced steady
growth over the past ten years and the Organizers expect the area, as well as
the service industry needed to support it, to continue to grow.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts and other time deposits
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of various types, ranging from daily money market accounts to longer-term
certificates of deposit. The transaction accounts and time certificates are
tailored to the Bank's principal market area at rates competitive to those
offered in the area. In addition, the Bank offers certain retirement account
services, such as Individual Retirement Accounts (IRAs). All deposit accounts
are insured by the FDIC up to the maximum amount allowed by law (generally,
$100,000 per depositor subject to aggregation rules). The Bank solicits these
accounts from individuals, businesses, associations and organizations, and
governmental authorities.
The Bank also offers a full range of short-to-medium term commercial
and personal loans. Commercial loans include both secured and unsecured loans
for working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education and personal investments.
The Bank also makes real estate construction and acquisition loans. The bank
originates fixed and variable rate mortgage loans in the name of a third party
which are sold into the secondary market. The Bank's lending activities are
subject to a variety of lending limits imposed by federal law. While differing
limits apply in certain circumstances based on the type of loan or the nature of
the borrower (including the borrower's relationship to the Bank), in general the
Bank is subject to a loan-to-one-borrower limit of an amount equal to 15% of the
Bank's unimpaired capital and surplus, or 25% of the unimpaired capital and
surplus if the excess over 15% is approved by the board of directors of the Bank
and is fully secured by readily marketable collateral. The Bank may not make any
loans to any director, officer, employee or 10% shareholder of the Company or
the Bank unless the loan is approved by the Board of Directors of the Bank and
is made on terms not more favorable to such person than would be available to a
person not affiliated with the Bank.
Other bank services include cash management services, safe deposit
boxes, travelers checks, direct deposit of payroll and social security checks,
and automatic drafts for various accounts. The Bank offers non-deposit
investment products and other investment brokerage services through a registered
representative with an affiliation through AAG Securities, Inc. The Bank is
associated with Honor and Plus networks of automated teller machines and
Mastermoney debit cards that may be used by Bank customers throughout South
Carolina and other regions. The Bank also offers VISA credit card services
through a correspondent bank as an agent for the Bank.
The Bank does not plan to exercise trust powers during its initial
years of operation. The Bank may in the future offer a full-service trust
department, but cannot do so without the prior approval of the OCC.
COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions and money market mutual funds operating in the
Columbia area and elsewhere. As of December 31, 1997, there were twelve
commercial banks operating approximately 136 offices and four thrifts with a
total of 4 offices in the Lexington and Richland county area. A number of these
competitors are well established in the Lexington Richland County Area. Most
of them have substantially greater resources and lending limits than the bank
and offer certain services, such as established branch networks and trust
services, that the Bank either does not currently provide. The Bank is the
only one of these institutions that is locally owned and operated. The Company
believes that the community bank focus of the Bank with its emphasis on service
to small and medium size businesses, individual and professional concerns gives
it an advantage in this market.
EMPLOYEES
The Bank presently has 20 full-time employees and three part-time
employees. The Company does not have any employees other than its officers,
none whom receive any remuneration for their services to the Company.
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SUPERVISION AND REGULATION
THE COMPANY
Because it owns the outstanding common stock of the Bank, the Company
is a bank holding company within the meaning of the federal Bank Holding
Company Act of 1956 (the "BHCA") and The South Carolina Bank Holding Company
Act (the "South Carolina Act"). The activities of the Company are also
governed by the Glass-Steagall Act of 1933 (the "Glass-Steagall Act").
Under the BHCA, the Company is subject to periodic examination by the
Federal Reserve and files periodic reports of its operations and such
additional information as the Federal Reserve may require. The Company's and
the Bank's activities are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries, and
engaging in other activities that the Federal Reserve determines to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
With certain limited exceptions, the BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve before (I)
acquiring substantially all the assets of any bank, (ii) acquiring direct or
indirect ownership or control of any voting shares of any bank if after such
acquisition it would own or control more than 5% of the voting shares of such
bank (unless it already owns or controls the majority of such shares), or (iii)
merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the BHCA and the
Change in Bank Control Act, together with regulations thereunder, require
Federal Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to
exist if a person acquires 10% or more but less than 25% of any class of voting
securities. The regulations provide a procedure for challenge of the
rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in, nonbanking activities, unless the
Federal Reserve Board, by order or regulation, has found those activities to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Some of the activities that the Federal Reserve Board
has determined by regulation to be proper incidents to the business of a bank
holding company include making or servicing loans and certain types of leases,
engaging in certain insurance and discount brokerage activities, performing
certain data processing services, acting in certain circumstances as a
fiduciary or investment or financial adviser, owning savings associations, and
making investments in certain corporations or projects designed primarily to
promote community welfare.
The Federal Reserve Board will impose certain capital requirements on
the Company under the BHCA, including a minimum leverage ratio and a minimum
ratio of "qualifying" capital to risk-weighted assets. These requirements are
described below under "-- Capital Regulations." Subject to its capital
requirements and certain other restrictions, the Company is able to borrow
money to make a capital contribution to the Bank, and such loans may be repaid
from dividends paid from the Bank to the Company (although the ability of the
Bank to pay dividends will be subject to regulatory restrictions as described
below in "-- The Bank -- Dividends"). The Company is also able to raise
capital for contribution to the Bank by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.
In accordance with Federal Reserve Board policy, the Company is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances in which the Company might not
otherwise do so. Under the BHCA, the Federal Reserve Board may require a bank
holding company to
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terminate any activity or relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of
the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid
the depository institution's financial condition.
The Company is also restricted in its activities by the provisions of
the Glass-Steagall Act, which prohibit the Company from owning subsidiaries that
are engaged principally in the issue, flotation, underwriting, public sale, or
distribution of securities. The interpretation, scope, and application of the
provisions of the Glass-Steagall Act currently are being considered and reviewed
by regulators and legislators, and the interpretation and application of those
provisions have been challenged in the federal courts.
As a bank holding company registered under the South Carolina Act, the
Company is subject to regulation by the South Carolina State Board of Financial
Institutions (the "South Carolina Board"). Consequently, the Company must
receive the approval of the South Carolina Board prior to engaging in the
acquisitions of banking or nonbanking institutions or assets. The Company must
also file with the South Carolina Board periodic reports with respect to its
financial condition and operations, management, and intercompany relationships
between the Company and its subsidiaries.
The Bank. The Bank is operating as a national banking association
incorporated under the laws of the United States and subject to examination by
the OCC. Deposits in the Bank are insured by the FDIC up to a maximum amount
(generally $100,000 per depositor, subject to aggregation rules). The OCC and
the FDIC regulate or monitor virtually all areas of the Bank's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations, maintenance of books and records, and adequacy of staff
training to carry on safe lending and deposit gathering practices. The OCC
requires the Bank to maintain certain capital ratios and imposes limitations on
the Bank's aggregate investment in real estate, bank premises, and furniture and
fixtures. The Bank is required by the OCC to prepare quarterly reports on the
Bank's financial condition and to conduct an annual audit of its financial
affairs in compliance with minimum standards and procedures prescribed by the
OCC.
Under FDICIA, all insured institutions must undergo regular on-site
examination by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates is assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a
method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution. FDICIA
also requires the federal banking regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating, among other things, to: (I) internal
controls, information systems, and audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset
quality.
National banks and their holding companies which have been chartered
or registered or undergone a change in control within the past two years or
which have been deemed by the OCC or the Federal Reserve Board, respectively,
to be troubled institutions must give the OCC or the Federal Reserve Board,
respectively, thirty days prior notice of the appointment of any senior
executive officer or director. Within the thirty day period, the OCC or the
Federal Reserve Board, as the case may be, may approve or disapprove any such
appointment.
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The Company and the Bank will meet the criteria which trigger this additional
approval during the first two years of operation.
The FDIC establishes rates for the payment of premiums by federally
insured banks and thrifts for deposit insurance. A separate Bank Insurance Fund
("BIF") and Savings Association Insurance Fund ("SAIF") are maintained for
commercial banks and thrifts, respectively, with insurance premiums from the
industry used to offset losses from insurance payouts when banks and thrifts
fail. Beginning in 1993, insured depository institutions pay for deposit
insurance under a risk-based premium system. Under this system, a BIF insured
depositor institution paid to BIF from $.04 to $.31 per $100 of insured deposits
depending on its capital levels and risk profile, as determined by its primary
federal regulator subject to a minimum semi-annual assessment of $1,000 per
institution. During 1996 the assessment rates for each category were adjusted
down by $.04. The Bank's BIF assessment was $.00 per $100 of insured deposits
and was therefore subject to the minimum $1,000 semi-annual assessment in 1996.
The Deposit Insurance Funds Act of 1996 eliminated the minimum assessment
required by statute. It also separates, effective January 1, 1997, the
Financing Corporation (FICO) assessment to service the interest on its bond
obligations. The amount assessed on individual institutions, including the
Bank, by the FICO will be in addition to the amount paid for deposit insurance
according to the risk-related assessment rate schedule. FICO assessment rates
for the first semi-annual period of 1997 were set at 1.30 basis points annually
for BIF deposits. For the first and second semi-annual period of 1997 and the
first semi-annual period of 1998, the FDIC Board of Directors maintained the
adjusted rate schedule and the Bank's insurance assessment remained at $.00 per
$100 in deposits through June 1998. Increases in deposit insurance premiums or
changes in risk classification will increase the Bank's cost of funds, and there
can be no assurance that such cost can be passed on the Bank's customers.
The Bank is subject to the provisions of Section 23A of the Federal
Reserve Act, which place limits on the amount of loans or extensions of credit
to, or investments in, or certain other transactions with, affiliates and on
the amount of advances to third parties collateralized by the securities or
obligations of affiliates. The aggregate of all covered transactions is
limited in amount, as to any one affiliate, to 10% of the bank's capital and
surplus and, as to all affiliates combined, to 20% of the bank's capital and
surplus. Furthermore, within the foregoing limitations as to amount, each
covered transaction must meet specified collateral requirements. Compliance is
also required with certain provisions designed to avoid the taking of low
quality assets.
The Bank is also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the
transactions are on terms substantially the same, or at least as favorable to
such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with non-affiliated companies. The Bank is subject to
certain restrictions on extensions of credit to executive officers, directors,
certain principal shareholders, and their related interests. Such extensions
of credit (I) must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with third parties and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features.
A national bank may not pay dividends from its capital: All dividends
must be paid out of undivided profits then on hand, after deducting expenses,
including reserves for losses and bad debts. In addition, a national bank is
prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless there has been transferred to surplus
no less than one-tenth of the bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The
approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for
that year combined with its retained net profits for the preceding two years,
less any required transfers to surplus.
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The OCC has promulgated regulations that became effective on December
13, 1990, which significantly affect the level of allowable dividend payments
for national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. In this regard, the allowance for loan and lease losses will not
be considered an element of either "undivided profits then on hand" or "net
profits." Further, a national bank may be able to use a portion of its capital
surplus account as "undivided profits then on hand," depending on the
composition of that account. In addition, under FDICIA, the Bank may not pay a
dividend if, after paying the dividend, the Bank would be undercapitalized.
National banks are required by the National Bank Act to adhere to
branch office banking laws applicable to state banks in the states in which
they are located. Under current South Carolina law, the Bank may open branch
offices throughout South Carolina with the prior approval of the OCC. In
addition, with prior regulatory approval, the Bank will be able to acquire
existing banking operations in South Carolina. Furthermore, federal
legislation has recently been passed which permits interstate branching. The
new law permits out of state acquisitions by bank holding companies (subject to
veto by new state law), interstate branching by banks if allowed by state law,
interstate merging by banks, and de novo branching by national banks if allowed
by state law. The Company currently has no plans or agreements whereby the
Bank would acquire other banks or thrifts.
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve, the FDIC, the OCC, or the Office of Thrift Supervision
(the "OTS") shall evaluate the record of the financial institutions in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility.
Interest and certain other charges collected or contracted for by the
Bank are subject to state usury laws and certain federal laws concerning
interest rates. The Bank's loan operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending
Act, governing disclosures of credit terms to consumer borrowers; the Home
Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution will be fulfilling its obligation to help meet the
housing needs of the community it serves; the Equal Credit Opportunity Act,
prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit; the Fair Credit Reporting Act of 1978, governing
the use and provision of information to credit reporting agencies; the Fair
Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal
laws. The deposit operations of the Bank also are subject to the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve Board to implement
that act, which governs automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based
capital guidelines for banks and bank holding companies that are designed to
make regulatory capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies, account for off-balance sheet
items. The guidelines are minimums, and the federal regulators have noted that
banks and bank holding companies contemplating significant expansion programs
should not allow expansion to diminish their capital ratios and should maintain
in excess of the minimums. Neither the Company nor the Bank has received any
notice indicating that either entity will be subject to higher capital
requirements. The current guidelines require all bank holding companies
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and federally-regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common shareholders' equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but
excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred
stock not included in Tier 1 capital, mandatory convertible securities, hybrid
capital instruments, subordinated debt and intermediate term-preferred stock,
and general reserves for loan and lease losses up to 1.25% of risk-weighted
assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds,
which have a 50% rating, and direct obligations of or obligations guaranteed by
the United States Treasury or United States Government agencies, which have a
0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%,
but most institutions are required to maintain an additional cushion of at
least 100 to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. Initially, the Organizers
expect the Bank to qualify as "well-capitalized."
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category 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.
The degree of regulatory scrutiny of a financial institution will increase, and
the permissible activities of the institution will decrease, as it moves
downward through the capital categories. Institutions that fall into one of
the three undercapitalized categories may be required to (I) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities; (iv) improve their management;
(v) eliminate management fees; or (vi) divest themselves of all or a part of
their operations. Bank holding companies controlling financial institutions
can be called upon to boost the institutions' capital and to partially
guarantee the institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways.
Subsequent to the initial public offering the Company's capital levels are more
than adequate. However, rapid growth, poor loan portfolio performance, or poor
earnings performance, or a combination of these factors, could change the
Company's capital position in a relatively short period of time, making an
additional capital infusion necessary.
Effective January 1, 1997 the OCC amended the risk-based capital
standards to incorporate a measure for market risk to cover all positions
located in an institution's trading account, foreign exchange and commodity
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positions wherever located. The effect of the rule is that it requires any
bank or bank holding company with significant exposure to market risk to
measure the risk and hold capital commensurate with that risk. Since the Bank
does not currently engage, nor has any plans to engage in trading, foreign
exchange or commodity position activities, the rule does not have an effect on
the required Bank capital levels.
Failure to meet capital requirements would mean that a bank would be
required to develop and file a plan with its primary federal banking regulator
describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital
adequacy, such as a branch or merger application, unless the bank could
demonstrate a reasonable plan to meet the capital requirement within a
reasonable period of time.
ENFORCEMENT POWERS
FIRREA expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties" (primarily including management,
employees, and agents of a financial institution, independent contractors such
as attorneys and accountants and others who participate in the conduct of the
financial institution's affairs). These practices can include the failure of
an institution to timely file required reports or the filing of false or
misleading information or the submission of inaccurate reports. Civil
penalties may be as high as $1,000,000 a day for such violations. Criminal
penalties for some financial institution crimes have been increased to twenty
years. In addition, regulators are provided with greater flexibility to
commence enforcement actions against institutions and institution-affiliated
parties. Possible enforcement actions include the termination of deposit
insurance. Furthermore, FIRREA expanded the appropriate banking agencies'
power to issue cease and desist orders that may, among other things, require
affirmative action to correct any harm resulting from a violation or practice,
including restitution, reimbursement, indemnifications or guarantees against
loss. A financial institution may also be ordered to restrict its growth,
dispose of certain assets, rescind agreements or contracts, or take other
actions as determined by the ordering agency to be appropriate.
RECENT LEGISLATIVE DEVELOPMENTS
The Interstate Banking Act, passed by Congress in 1994, allows
unrestricted interstate bank mergers and interstate acquisition of banks by
bank holding companies, and ultimately will permit interstate de novo branching
by banks. The states, however, may opt in or opt out of several of the
Interstate Banking Act's provisions. In 1994, South Carolina amended its bank
holding company act to opt into these provisions and allow nationwide
interstate banking beginning in 1996. As a result of these new laws, the
number of competitors in the Company's market may increase. However, the
Company believes it can compete effectively in the market and that the
legislation will not have a material adverse impact on the Company or the Bank.
From time to time, various bills are introduced in the United States Congress
and at the state legislative level with respect to the regulation of financial
institutions. Certain of these proposals, if adopted, could significantly
change the regulation of banks and the financial services industry. The
Company cannot predict whether any of these proposals will be adopted or, if
adopted, how these proposals would affect the Company.
EFFECT OF GOVERNMENTAL MONETARY POLICIES
The earnings of the Bank are affected by domestic economic conditions
and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve Board's monetary policies have had, and will
likely continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The
monetary policies of the Federal Reserve Board have major effects upon the
levels of bank loans, investments and deposits through its open market
operations in United States government securities and through
8
<PAGE> 10
its regulation of the discount rate on borrowings of member banks and the
reserve requirements against member bank deposits. It is not possible to
predict the nature or impact of future changes in monetary and fiscal policies.
ITEM 2. DESCRIPTION OF PROPERTY.
Lexington Property. The principal place of business of both the
Company and the Main Office is located at 5455 Sunset Boulevard, Lexington,
South Carolina 29072. The site of the Bank's main office is a 2.29 acre plot
of land. The site was purchased for $576,000. The Company and the Bank are
operating in an 8500 square foot facility located on this site. This site is
designed to allow the addition of 12,000 square feet to the facility at some
future date and as needed.
Forest Acres Property. The Bank also operates a Branch Office
facility at 4404 Forest Drive, Columbia, South Carolina 29206. The Forest
Acres site is a .71 acre plot of land which was acquired at a cost of $376,000.
The banking facility is approximately 4,000 square feet with a total cost of
construction of approximately $545,000 including paving and landscaping.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings related to the
business of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of common stock, par value $1.00 per share (the "Common
Stock"), of which 689,677 were issued and outstanding as of December 31, 1997.
There is currently no established public trading market in the Common Stock,
and there is no assurance one will develop in the near future.
The Company has never paid any dividends. It is anticipated that
earnings will be retained for several years to expand the Bank's capital base
to support deposit growth and that no dividends will be paid on the Company's
stock for the next three years. Dividends might not be paid for several years
thereafter.
Moreover, the National Banking Act limits dividend payments by
national banks such as the Bank, which in turn could limit the Company's
ability to pay dividends. The Bank may only pay dividends out of its net
profits then on hand, after deducting expenses, including losses and bad debts.
In addition, the Bank is prohibited from declaring a dividend on its shares of
common stock until its surplus equals its stated capital, unless there has been
transferred to surplus no less than one-tenth of the Bank's net profits of the
preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC will be required if the total of all
dividends declared in any calendar year by the Bank exceeds the Bank's net
profits to date, as defined, for that year combined with its retained net
profits for the preceding two years less any required transfers to surplus. At
December 31, 1997, the Bank was not yet cumulatively profitable. The OCC also
has the authority under federal
9
<PAGE> 11
law to enjoin a national bank from engaging in what in its opinion constitutes
an unsafe or unsound practice in conducting its business, including the payment
of a dividend under certain circumstances.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
First Community Corporation is a one bank holding company. The
Company commenced operations on November 2, 1994. The Bank, the Company's only
subsidiary, began operations on August 17, 1995 from it's first office located
in Lexington, South Carolina. On September 14, 1995 the Company opened it's
second office located in Forest Acres, South Carolina. The Company expected
to experience losses until the Bank grew its assets to a point where the
assets generated revenue from operations which exceeded the Bank's fixed costs.
The Company experienced it's first quarterly profit in the fourth quarter of
1996 and has experienced increased profits for each subsequent quarter through
the fourth quarter of 1997. Comparisons of the Company's and the Bank's
results for all of the periods presented, particularly with respect to their
banking operations, should be made with an understanding of these events. The
following discussion is intended to assist the readers in understanding and
evaluating the financial condition and results of operations of the Company.
This review should be read in conjunction Company's financial statements and
accompanying notes included elsewhere herein. This analysis provides an
overview of the significant changes that occurred during the periods presented.
RESULTS OF OPERATIONS
The Company's net income was $251,000 or $0.36 per share for the
year-ended December 31, 1997, as compared to a loss of $282,000 or $0.41 per
share for the year ended December 31, 1996, and a loss of $558,000 or $1.59
per share for the year ended December 31, 1995. The increase in net income
from 1996 to 1997 results primarily from a $778,000 increase in net interest
income. Increased net interest income resulted from continued increases in the
level of all categories of earning assets since opening the Bank in August of
1995. Although yields earned and rates paid on the various components of the
balance sheet showed only modest changes between the periods, there was
improvement in the net interest margin because of a change in the mix of
earning assets during 1997 as compared to 1996. A $136,000 increase in
non-interest income in 1997 as compared to 1996 also contributed to the
improvement in net income. Increases in non-interest income resulted from
increased deposit and related account charges associated with increased
deposit balances. The increases in net interest income and non-interest income
were partially offset by a $323,000 increase in non-interest expense. All
categories of non-interest expense increased with the exception of occupancy
expense. The increases in expenses primarily result from anticipated
increases in staff during this period as well as higher marketing and
advertising expenses during our second full year of operations.
The 1995 loss of $558,000 includes approximately four months of
operations and eight months of preopening activities. The decrease in the net
loss between 1996 and 1995, of 49.5% resulted from the Bank continuing to
leverage its capital with an increased volume of earning assets. The return
on average assets for 1997, 1996 and 1995, was 0.56%, (1.04%) and (8.65%),
respectively and return on average equity was 4.3%, (4.8%) and (17.0%),
respectively.
Net Interest Income
The largest component of operating earnings for the Company is net
interest income, which is the difference between the income earned on assets
and interest paid on deposits and borrowings used to support such assets. Net
interest income is determined by the rates earned on the Company's
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
10
<PAGE> 12
liabilities, and the degree of mismatch and the maturity and repricing
characteristics of its interest-earning assets and interest-bearing
liabilities.
Net interest income totaled $1,802,000 in 1997, $1,024,000 in 1996 and
$245,000 in 1995. Net interest spread, the difference between the yield on
earning assets and the rate paid on interest-bearing liabilities, was 3.55% in
1997 as compared to 3.13% in 1996 and 1.72% in 1995. The reason for the
increase between 1997 and 1996 was primarily due to the $16,674,000 increase the
level of earning assets between the two periods. In addition, the changing mix
of the earning asset portfolio resulted in improvement in the net interest
margin to 4.44% in 1997 as compared to 4.28% in 1996. During 1997, 57.1% of
earning assets were in the loan portfolio as compared to 44.5% in 1996. Loans
typically provide a higher yield than the other types of earning assets and thus
one of the Company's goals is to continue to grow this portfolio as a percentage
of total earning assets. Similarly, the increase in net interest income of
$779,000 in 1996 as compared to 1995 was the result of increases in the level of
earning assets as well as an improvement in the net interest spread from 1.72%
in 1995 as compared to 3.13% in 1996. During 1995, the loan portfolio
represented only 10.6% of the average earning asset portfolio.
11
<PAGE> 13
Average Balances, Income Expenses and Rates. The following tables
depict, for the periods indicated, certain information related to the Company's
average balance sheet and its average yields on assets and average costs of
liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
(IN THOUSANDS) YEAR ENDED DECEMBER 31, 1997
------------------------ ------------------------ ------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans (1) . . . . . . . . . . . . . . . $23,192 $2,184 9.42% $10,648 $1,004 9.43% 584 $ 57 9.79%
Securities:
Taxable . . . . . . . . . . . 13,239 782 5.91% 10,856 635 5.85% 2,357 136 5.79%
Federal funds sold and securities purchased
under agreement to resell
4,193 228 5.43% 2,446 130 5.33% 1,082 62 5.81%
Other short term investments, pre-opening - - - - - - 1,512 87 5.74%
------- ------ ---- ------- ------ ---- ------ ---- ----
Total earning assets . . . . . . . . . . 40,624 3,194 7.86% 23,950 1,770 7.39% 5,536 343 6.20%
------- ------ ---- ------- ------ ---- ------ ---- ----
Cash and due from banks . . . . . . . . . . . 1,349 928 162
Premises and equipment . . . . . . . . . . . 2,873 2,020 732
Other assets . . . . . . . . . . . . . . . . 351 258 32
Allowance for loan losses . . . . . . . . . . (284) (132) (10)
------ ------- ------
Total assets . . . . . . . . . . . . . . $44,913 $27,024 6,452
======= ======= ======
LIABILITIES
Interest-Bearing Liabilities
Interest-bearing transaction accounts (1) 4,393 61 1.40% 2,411 36 1.49% 236 5 1.94%
Money Market accounts . . . . . . . . . . 4,740 213 4.50% 1,595 52 3.24% 284 10 3.60%
Savings deposits (1) . . . . . . . . . . . 6,264 240 3.84% 3,707 148 4.01% 446 18 3.97%
Time deposits (1) . . . . . . . . . . . . 15,251 802 5.26% 8,646 459 5.31% 1,082 58 5.41%
Other short-term borrowings . . . . . . . 1,662 75 4.48% 1,167 51 4.32% 144 7 4.99%
------- ------ ---- ------- ------ ---- ------ ---- ----
Total interest-bearing liabilities . . . 32,310 1,392 4.31% 17,526 746 4.26% 2,192 98 4.48%
------- ------ ---- ------- ------ ---- ------ ---- ----
Demand deposits (1) . . . . . . . . . . . . . 6,440 3,449 220
Other liabilities . . . . . . . . . . . . . . 296 197 762
Shareholders' equity . . . . . . . . . . . . 5,867 5,852 3,278
------- ------- ------
Total liabilities and shareholders' equity
$44,913 $27,024 $6,452
======= ======= ======
Net interest spread . . . . . . . . . . . . . 3.55% 3.13% 1.72%
Net interest income/margin . . . . . . . . . $1,802 4.44% $1,024 4.28% $245 4.43%
====== ====== ====
</TABLE>
- ----------------------
(1) All loans and deposits are domestic. The Company had no nonaccrual loans
during the periods presented.
12
<PAGE> 14
The following table presents the dollar amount of changes in interest
income and interest expense attributable to changes in volume and the amount
attributable to changes in rate. The combined effect in both volume and rate,
which cannot be separately identified, has been allocated proportionately to
the change due to volume and due to rate.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 versus 1996 1996 versus 1995
Increase (decrease) due to Increase (decrease) due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans $1,181 $ (1) $1,180 $ 949 $ (2) $ 947
Securities: 141 6 147 497 2 499
Federal funds sold and securities
purchased under agreements to resell 95 (2) 97 72 (4) 68
Other short-term investments, (87) - (87)
----- ------
Total earning assets 1,304 120 1,424 1,349 78 1,427
----- ------
INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts 27 (2) 25 32 (1) 31
Money market accounts 135 27 162 42 (1) 41
Savings deposits 98 (6) 92 131 (1) 131
Time deposits 347 (4) 343 403 (1) 402
Other short term borrowings 22 2 24 44 (1) 43
----- ------
Total interest-bearing liabilities 637 9 646 652 (4) 648
----- ------
Net interest income $ 778 $ 779
===== ======
</TABLE>
Interest Sensitivity. The Company monitors and manages the pricing
and maturity of its assets and liabilities in order to diminish the potential
adverse impact that changes in interest rates could have on its net interest
income. A monitoring technique employed by the Company is the measurement of
the Company's interest sensitivity "gap," which is the positive or negative
dollar difference between assets and liabilities that are subject to interest
rate repricing within a given period of time. Also, asset/liability modeling
is performed by the Company to assess the impact varying interest rates and
balance sheet mix assumptions will have on net interest income. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity or
by adjusting the interest rate during the life of an asset or liability.
Managing the amount of assets and liabilities repricing in the same time
interval helps to hedge the risk and minimize the impact on net interest income
of rising or falling interest rates. The Company evaluates interest
sensitivity risk and then formulates guidelines regarding asset generation and
repricing, funding sources and pricing, and off-balance sheet commitments in
order to decrease interest sensitivity risk.
13
<PAGE> 15
The following table illustrates the Company's interest rate
sensitivity at December 31, 1997.
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
AFTER THREE AFTER SIX GREATER THAN
WITHIN THROUGH SIX THROUGH WITHIN ONE YEAR OR
THREE MONTHS MONTHS TWELVE MONTHS ONE YEAR NONSENSITIVE TOTAL
------------ ------ ------------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans . . . . . . . . . . . . $13,056 $1,435 $ 1,210 $15,701 $13,299 $29,000
Securities . . . . . . . . . . 2,494 293 1,297 4,084 9,423 13,507
Federal funds sold and securities
purchased under agreement to
resell . . . . . . . . . . . . 2,620 2,620 2,620
------ ------- ------ ------ ------- -------
Total earning assets . . . . 18,170 1,728 2,507 22,405 22,722 45,127
------ ------- ------ ------ ------- -------
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
NOW Accounts (1) . . . . . 758 758 1,516 3,032 3,031 6,063
Money Market accounts . . . . 5,957 5,957 5,957
Savings deposits (1) . . . . 756 757 1,513 3,026 3,027 6,053
Time deposits . . . . . . . 9,216 3,884 1,642 14,742 1,878 16,620
------ ------- ------ ------ ------- -------
Total interest-
bearing deposits . . . . 16,687 5,399 4,671 26,757 7,936 34,693
Other short-term borrowings . 2,143 2,143 2,143
------ ------- ------ ------ ------- -------
Total interest-bearing
liabilities . . . . . . 18,830 5,399 4,671 28,900 7,936 36,836
------ ------- ------ ------ ------- -------
Period gap . . . . . . . . . . . $( 660) ($3,671) ($2,164) ($6,495) $14,786 $8,291
Cumulative gap . . . . . . . . . $( 660) ($4,331) ($6,495) ($6,495) $8,291 $8,291
Ratio of cumulative gap to
total earning assets . . . . . (1.46)% (9.60)% (14.39)% (14.39)% 18.37%
</TABLE>
(1)NOW and savings accounts are subject to immediate withdrawal and repricing.
These deposits do not tend to immediately react to changes in interest rates
and the company believes these deposits are a stable and predictable funding
source. Therefore, these deposits are included in the repricing period that
management believes most closely matches the periods in which they are likely
to reprice rather than the period in which the funds can be withdrawn
contractually.
The Company generally would benefit from increasing market rates of
interest when it has an asset-sensitive gap and generally would benefit from
decreasing market rates of interest when it is liability sensitive. The
Company currently is liability sensitive over all time frames. However, the
Company's gap analysis is not a precise indicator of its interest sensitivity
position. The analysis presents only a static view of the timing of maturities
and repricing opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally. Net interest
income is also impacted by other significant factors, including changes in the
volume and mix of earning assets and interest-bearing liabilities.
Provision and Allowance for Loan Losses
The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem credits. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there can be
no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the loan loss allowance will not
be required.
14
<PAGE> 16
Additions to the allowance for loan losses, which are expended as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio. Currently,
the allowance for loan losses is evaluated on an overall portfolio basis.
Management intends to implement an allocation system in the future. This
system will allocate the allowance to loan categories, and will be implemented
at the time the size and mix of the portfolio support such a system. The
amount of the provision is a function of the level of loans outstanding, the
level of nonperforming loans, historical loan loss experience, the amount of
loan losses actually charged against the reserve during a given period, and
current and anticipated economic conditions.
At December 31, 1997 and 1996, the allowance for loan losses amounted
to $380,000 and $201,000, respectively. This represents 1.31% and 1.20% of
outstanding loans at December 31, 1997 and 1996, respectively. There were no
charge-offs during 1995. There were no non-accrual, restructured or other
non-performing loans at December 31, 1997, 1996 or 1995. In addition, there
were no loans delinquent greater than 30 days. The provision for loan losses
was $194,000, $135,000 and $77,000 for the years ended December 31, 1997, 1996
and 1995, respectively. The provision was made based on management's
assessment of general loan loss risk and asset quality.
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Average loans outstanding .................... $23,192 $10,648 $ 584
======= ======= =======
Loans outstanding at period end .............. $29,000 $15,915 $ 3,756
======= ======= =======
Total nonperforming loans ........... -- -- --
======= ======= =======
Beginning balance of allowance ............... $ 201 $ 77 $ --
Loans charged-off:
1-4 family residential mortgage loans -- -- --
Home equity loans ................... -- -- --
Commercial loans .................... -- -- --
Lease receivables ................... 14 10 --
Installment & credit card loans ..... 4 11 --
------- ------- -------
Total loans charged-off ..... 18 11 --
------- ------- -------
Recoveries of previous charge-offs:
1-4 family residential mortgage loans -- -- --
Home equity loans ................... -- -- --
Commercial loans .................... -- -- --
Lease receivables ................... 3 -- --
Installment & credit card loans ..... -- -- --
------- ------- -------
Total recoveries ............ 3 -- --
------- ------- -------
Net loans charged-off ........................ 15 11 --
------- ------- -------
Provision for loan losses .................... 194 135 77
------- ------- -------
Balance at period end ........................ $ 380 $ 201 $ 77
======= ======= =======
Net charge-offs to average loans ............. -- -- --
------- ------- -------
Allowance as percent of total loans .......... 1.31% 1.26% 2.08%
Nonperforming loans as % of total loans ...... -- -- --
Allowance as % of nonperforming loans ........ -- -- --
</TABLE>
Accrual of interest is discontinued on loans when management
believes, after considering economic and business conditions and collection
efforts, that a borrower's financial condition is such that the collection of
interest is doubtful. A delinquent loan is generally placed in nonaccrual
status when it becomes 90 days or more past due. At the time a loan is placed
in nonaccrual status, all interest which
15
<PAGE> 17
has been accrued on the loan but remains unpaid is reversed and deducted from
earnings as a reduction of reported interest income. No additional interest is
accrued on the loan balance until the collection of both principal and interest
becomes reasonably certain.
Potential Problem Loans. A potential problem loan is one in which
management has serious doubts about the borrower's future performance under the
terms of the loan contract. These loans are current as to principal and
interest and, accordingly, they are not included in nonperforming assets
categories. At December 31, 1997, the Company had no loans considered by
management to be potential problem loans. The level of potential problem loans
is one factor to be used in the determination of the adequacy of the allowance
for loan losses.
Noninterest Income and Expense
Noninterest Income. The Company's primary source of noninterest income
is service charges on deposit accounts. In addition, the Company originates
mortgage loans which are closed in the name of a third party for which the
Company receives a fee. Other sources of noninterest income is derived from
bankcard fees, commissions on check sales, safe deposit box rent, wire transfer
and official check fees. Noninterest income for the year ended December 31,
1997, was $262,000 as compared to $126,000 for 1996. This increase is primarily
a result of the substantial growth in deposit account balances and the related
deposit account fees. These fees amounted to $171,000 in 1997 as compared to
$82,000 in 1996. Mortgage loan origination fees amounted to $41,000 in 1997 as
compared to $25,000 in 1996. This increase is a result of more emphasis being
placed on this source of revenue in 1997 as compared to 1996. Noninterest income
amounted to $20,000 in 1995. The substantial increase in 1996 is attributable
to the fact that the Bank did not begin operations until August 1995, and
therefore had only four months of operations in 1995.
Noninterest Expense. In the very competitive financial services market
of recent years, management recognizes the need to place a great deal of
emphasis on expense management and will continue to evaluate and monitor growth
in discretionary expense categories in order to control future increases.
Noninterest expense increased from $1,297,000 for the year ended December 31,
1996 to $1,619,000 for the year ended December 31, 1997. Salary and employee
benefits increased $172,000 in 1997 as compared to 1996. This increase results
from normal merit increases as well as the addition of two full time equivalent
and one part time equivalent employees in late 1996 and early 1997. Occupancy
expense decreased from $130,000 in 1996 to $114,000 in 1997. This decrease is a
result of reduced cost related to the move of the Lexington office in August
1996 and the move of the Forest Acres office in June 1997 to permanent
facilities. Prior to moving into permanent facilities the cost of the temporary
facilities were being depreciated over a short time period and resulted in
higher depreciation expense during the comparable periods. Equipment expense
increased from $102,456 in 1996 to $144,000 in 1997. This increase is
primarily due to increased maintenance contract expense of approximately $31,000
for computer hardware and software which was initially under warranty for the
first twelve months after being purchased. Marketing and public relations
expense increased to $90,197 in 1997 as compared to $36,000 in 1996. This
increase is attributable to planned increases in advertising during the Bank's
second full year of operations. Correspondent bank fees, postage and other
expenses increased primarily as a result of the growth of the Company in 1997 as
compared to 1996 and the resulting increased activity.
Noninterest expense increased $551,000 in 1996 as compared to 1995.
This is a result of the Bank being in operation for only four months in 1995.
Preopening activities accounted for $251,000 of the non interest expenses
during 1995. These pre-opening activities included the preparation and filing
of applications with various regulators and planning and organizing activities
for the opening of the Bank.
16
<PAGE> 18
The following table sets forth for the periods indicated, the primary
components of noninterest expense:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits $ 876 $ 704 $ 251
Occupancy 114 130 58
Equipment 144 102 30
Marketing and public relations 90 36 27
Data processing 96 94 33
Supplies 52 44 27
Telephone 22 23 8
Correspondent services 38 30 7
Insurance 32 22 8
Professional fees 36 36 14
Postage 22 13 2
Other 97 63 30
Pre-opening expense - - 251
------ ------ -----
$1,619 $1,297 $ 746
====== ======= =====
</TABLE>
Income Tax Expense
The Company had a operating loss carryforward of approximately
$733,000, $984,000 and $700,000 for the year ended December 31, 1997, 1996 and
1995, respectively. The realization of a deferred tax benefit by the Company as
a result of net operating losses depends upon having sufficient taxable income
of an appropriate character in the carryforward periods. The Company recognizes
deferred tax assets for future deductible amounts resulting from differences in
the financial statement and tax bases of assets and liabilities and operating
loss carryforwards. A valuation allowance is then established to reduce the
deferred tax asset to the level that it is "more likely than not" that the tax
benefit will be realized. The Company has fully offset the deferred tax assets
resulting primarily from the provision for bad debts, deferred pre-opening cost
and the net operating loss carryforwards by a valuation
allowance in the same amount.
FINANCIAL POSITION
Total assets at December 31, 1997, were $51,012,000 as compared to
$38,129,000 at December 31, 1996. Average earning assets increased to
$40,624,000 during 1997 as compared to $23,950,000 during 1996. Asset growth
was principally attributable to a net increase in loans of $13,085,000 during
1997. The loan growth was funded by an increase in deposit balances of
$11,346,000 from year-end 1996 to year-end 1997. Shareholders' equity
totaled $6,115,000 at December 31, 1997 as compared to $5,782,000 at December
31, 1996. This increase was primarily due to retained net income during 1997,
as well as an increase in the unrealized gain/loss on investment securities
available for sale in the amount of $66,000.
Earning Assets
Loans. Loans typically provide higher yields than the other types of
earning assets, and thus one of the Bank's goals was to have loans be the
largest category of the Bank's earning assets. At December 31, 1997 loans
accounted for 64.3% of earning assets as compared to 47.5% of earning assets at
December 31, 1996. Associated with the higher loan yields are the inherent
credit and liquidity risks which management attempts to control and
counterbalance. Management is not willing to sacrifice asset quality in order
to achieve its asset mix goals. Loans averaged $23,192,000 during 1997, as
compared to $10,648,000 in 1996.
17
<PAGE> 19
The following table shows the composition of the loan portfolio by
category:
<TABLE>
<CAPTION>
(In thousands) December 31,
------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and $ 7,148 24.65% $ 2,837 17.83% $ 497 12.96%
agricultural
Real Estate:
Construction 2,006 6.92% 792 4.97% 35 .91%
Mortgage-residential 4,457 15.37% 2,602 16.35% 664 17.34%
Mortgage-commercial 10,454 36.05% 6,639 41.72% 1,580 41.22%
Consumer 4,880 16.83% 2,762 17.35% 1,057 27.57%
Leases 55 .18% 283 1.78% -- --
-------- ------ -------- ------ -------- ------
Total gross loans 29,000 100.00% 15,915 100.00% 3,833 100.00%
====== ====== ======
Allowance for loan losses (380) (201) ( 77)
-------- -------- --------
Total net loans $ 28,620 $ 15,714 $ 3,756
======== ======== ========
</TABLE>
The principal components of the Company's loan portfolio, at year end
1997 and 1996, were commercial mortgage loans in the amount of $10,454,000 and
$6,639,000, representing 36.05% and 41.72% of the portfolio, respectively. A
significant portion of these commercial mortgage loans are made to finance owner
occupied real estate. Due to the short term the loan portfolio has existed, the
current portfolio may not be indicative of the ongoing portfolio mix.
Management maintains a conservative philosophy regarding its underwriting
guidelines, and believes it will reduce the risk elements of its loan portfolio
through strategies that diversify the lending mix.
The repayment of loans in the loan portfolio as they mature is a
source of liquidity for the Company. The following table sets forth the
Company's loans maturing within specified intervals at December 31, 1997.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1997
----------------------------------------------
OVER ONE YEAR
ONE YEAR THROUGH OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
-------- -------------- ---------- -------
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural.................................. $ 2,077 $ 4,558 $ 513 $ 7,148
Real estate - construction.................... 1,433 571 -- 2,004
All other loans............................... 3,527 12,488 3,833 19,848
------- ------- ------- -------
$ 7,037 $17,617 $ 4,346 $29,000
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates................................................... $15,291
Floating interest rates................................................ 6,672
-------
$21,963
=======
</TABLE>
The information presented in the above table is based on the
contractual maturities of the individual loans, including loans which may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
their maturity.
18
<PAGE> 20
Investment Securities. The investment securities portfolio is a
significant component of the Company's total earning assets. Total securities
averaged $13,239,000 in 1997, as compared to $10,856,000 in 1996. This
represents 32.59% and 45.33% of the average earning assets for the year ended
December 31, 1997 and 1996, respectively. The objective of the Company in its
management of the investment portfolio is to maintain a portfolio of high
quality, highly liquid investments with returns competitive with short term U.S.
Treasury or agency obligations. This policy is particularly important as the
Company continues to emphasize increasing the percentage of the loan portfolio
to total earning assets. At December 31, 1997, the weighted average life of the
portfolio was 1.7 years and the weighted average yield was 5.94%. The Company
primarily invests in U.S. Treasury securities and securities of other U.S.
Government agencies with maturities up to five years.
The following table shows, at carrying value, the scheduled maturities
and average yields of securities held at December 31, 1997.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS (1)
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1997
-------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT AFTER TEN
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS YEARS
------------- -------------- ---------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. government agencies .. $ 500 6.39% $1,400 6.03%
------ ---- ------ ----
Available-for-sale:
U.S. Treasury ............. 3,085 5.45% 2,719 5.95%
U.S. government agencies .. 500 5.98% 5,150 6.15%
Other ..................... $153 6.00%
------ ---- ------ ---- ----- ---- ---- ----
Total investment securities
available-for-sale ........ 3,585 5.52% 7,869 6.09% 153 6.00%
------ ---- ------ ----- ----- ---- ---- ----
Total investment securities $4,085 5.63% $9,269 6.08% $153 6.00%
====== ==== ====== ==== ===== ==== ==== ====
</TABLE>
- ----------------------
(1) Investments with a call feature are shown as of the contractual maturity
date.
Short-Term Investments. Short-term investments, which consist of
federal funds sold and securities purchased under agreements to resell,
averaged $4,193,000 in 1997, as compared to $2,446,000 in 1996. At December
31, 1997, short-term investments totaled 2,620,000. These funds are a primary
source of the Company's liquidity and are generally invested in an earning
capacity on an overnight basis.
19
<PAGE> 21
Deposits and Other Interest-Bearing Liabilities
Deposits. Average total deposits were $37,088,000 during 1997, compared to
$19,808,000 during 1996. Average interest-bearing deposits were $30,648,000 in
1997, as compared to $16,359,000 in 1996.
The following table sets forth the deposits of the Company by
category.
DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
------------------ ----------------- ------------------
Percent of Percent of Percent of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Demand deposit accounts . . . . . . . $ 7,554 17.88% $ 6,044 19.56% $1,255 11.06%
NOW accounts . . . . . . . . . . . . 6,063 14.35% 3,989 12.91% 1,228 10.84%
Money market accounts . . . . . . . . 5,957 14.10% 1,974 6.39% 1,549 13.67%
Savings accounts . . . . . . . . . . 6,053 14.33% 7,154 23.15% 1,779 15.70%
Time deposits less than $100,000 . . 10,248 24.26% 6,732 21.78% 2,905 25.63%
Time deposits of $100,000 or over . . 6,372 15.08% 5,008 16.21% 2,618 23.10%
-------- ------ ------- ------ ------- -----
Total deposits . . . . . . . $ 42,247 100.00% $30,901 100.00% $11,334 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
Core deposits, which exclude certificates of deposit of $100,000 or
more, provide a relatively stable funding source for the Company's loan
portfolio and other earning assets. The Company's core deposits were
$35,875,000 and $25,893,000 at December 31, 1997 and 1996, respectively. A
stable base of deposits are expected to be the Company's primary source of
funding to meet both its short-term and long-term liquidity needs in the
future.
The maturity distribution of the Company's time deposits at December
31, 1997, is shown in the following table.
MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1997
-------------------------------------------------------------------
AFTER THREE AFTER SIX AFTER
WITHIN THREE THROUGH THROUGH TWELVE TWELVE
MONTHS SIX MONTHS MONTHS MONTHS TOTAL
------ ---------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Certificates of deposit of $100,000 or more...... $4,220 $ 1,341 $107 $704 $ 6,372
Other time deposits of $100,000 or more.......... - - - - -
------ ------ ---- ---- -------
Total........................................ $4,220 $1,341 $107 $704 $ 6,372
====== ====== ==== ==== =======
</TABLE>
Large certificate of deposit customers tend to be extremely sensitive
to interest rate levels, making these deposits less reliable sources of funding
for liquidity planning purposes than core deposits. Some financial institutions
partially fund their balance sheets using large certificates of deposit obtained
through brokers. These brokered deposits are generally expensive and are
unreliable as long-term funding sources. Accordingly, the Company does not
accept brokered deposits.
20
<PAGE> 22
Borrowed funds. Borrowed funds consist primarily of short-term
borrowings in the form of securities sold under agreements to repurchase. These
borrowings averaged $1,548,000 and $1,098,380 during 1997 and 1996,
respectively. These repurchase agreements are generally originated with
customers that have other relationships with the Company and tend to provide a
stable and predictable source of funding.
The Company has short term borrowings provided through a U.S. Treasury
demand note associated with a treasury tax and loan account. The average
balance of this note for 1997 and 1996, was $114,000 and $68,000, respectively.
Capital
Total shareholders' equity as of December 31, 1997 was $6,115,000, an
increase of $333,000 or approximately 5.8% compared with shareholders' equity of
$5,782,000 as of December 31, 1996. This increase was attributable to net
income for the year ended December 31, 1997 of $251,000 a $66,000 increase in
the market value of investment securities available-for-sale and $16,000 in net
proceeds from issuance of Common Stock pursuant to the exercise of outstanding
stock options.
Under the capital guidelines of the OCC, the Bank is currently
required to maintain a minimum risk-based total capital ratio of 8%, with at
least 4% being Tier 1 capital. Tier 1 capital consists of common shareholders'
equity, qualifying perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries, less goodwill. In addition, the Bank
must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets)
of at least 3%, but this minimum ratio is increased by 100 to 200 basis points
for other than the highest-rated institutions. The Company will be required by
the Federal Reserve to meet the same guidelines once its consolidated total
assets exceed $150 million.
The Company and the Bank exceeded their regulatory capital ratios, as
set forth in the following table.
ANALYSIS OF CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
REQUIRED ACTUAL EXCESS
-------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
THE BANK:
December 31, 1997
Risk Based Capital
Tier I $1,401 4.00% $5,232 14.93% $3,831 10.93%
Total Capital 2,803 8.00% 5,612 16.02% 2,809 8.02%
Tier I Leverage 1,463 3.00% 5,232 10.73% 3,769 7.73%
December 31, 1996
Risk Based Capital
Tier I $ 851 4.00% $4,982 23.41% $4,131 19.41%
Total Capital 1,703 8.00% 5,183 24.35% 3,480 20.35%
Tier I Leverage 1,011 3.00% 4,982 14.79% 3,971 11.79%
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
REQUIRED ACTUAL EXCESS
-------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
THE COMPANY:
December 31, 1997
Risk Based Capital
Tier I $1,401 4.00% $6,098 17.41% $4,697 13.41%
Total Capital 2,803 8.00% 6,478 18.49% 3,675 10.49%
Tier I Leverage 1,464 3.00% 6,098 12.50% 4,634 9.50%
December 31, 1996
Risk Based Capital
Tier I $ 851 4.00% $5,824 27.37% $4,973 23.37%
Total Capital 1,703 8.00% 6,025 28.31% 4,322 20.31%
Tier I Leverage 1,011 3.00% 5,824 17.29% 4,813 14.29%
</TABLE>
A condition of the original offering was that a minimum of 610,000
shares be subscribed to and fully paid for prior to approval to become a bank
holding company. There was a total of 688,077 shares sold during the offering
period with gross proceeds after offering expenses of $6,829,000. Approximately
$6,000,000 of the proceeds of the offering were used to capitalize the Bank.
The remaining offering proceeds will be used to provide working capital,
including additional capital for investment in the Bank, if needed.
LIQUIDITY MANAGEMENT
Liquidity management involves monitoring the Company's sources and
uses of funds in order to meet its day-to-day cash flow requirements while
maximizing profits. Liquidity represents the ability of a company to convert
assets into cash or cash equivalents without significant loss and to raise
additional funds by increasing liabilities. Liquidity management is made more
complicated because different balance sheet components are subject to varying
degrees of management control. For example, the timing of maturities of the
investment portfolio is very predictable and subject to a high degree of
control at the time investment decisions are made. However, net deposit
inflows and outflows are far less predictable and are not subject to nearly the
same degree of control. Asset liquidity is provided by cash and assets which
are readily marketable, or which can be pledged, or which will mature in the
near future. Liability liquidity is provided by access to core funding
sources, principally the ability to generate customer deposits in the company's
market area. In addition, liability liquidity is provided through the ability
to borrow against approved lines of credit (federal funds purchased) from
correspondent banks and to borrow on a secured basis through securities sold
under agreements to repurchase.
With the successful completion of the common stock offering in 1995,
the Company has maintained a high level of liquidity that has been adequate to
meet planned capital expenditures, as well as providing the necessary cash
requirements of the Company and the Bank needed for operations. The Company's
funds sold position, its primary source of liquidity, averaged $4,193,000
during the year ended December 31, 1997, and was $2,620,000 at December 31,
1997. The Company also maintains federal funds purchased lines, in the amount
of $2,500,000, with several financial institutions, although these have not
been utilized in 1997. Management regularly reviews the liquidity position of
the Company and has implemented internal policies which establish guidelines
for sources of asset based liquidity and limit the total amount of purchased
funds used to support the balance sheet and funding from non core sources.
Management believes that its existing stable base of core deposits along with
continued growth in this deposit base will enable the Company to meet its long
term liquidity needs successfully.
22
<PAGE> 24
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130, (SFAS 130) "Reporting
Comprehensive Income. SFAS 130 established standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 requires that companies (I) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial position at the end of an accounting period. SFAS 130 is
effective for fiscal years beginning after December 31, 1997. Reclassification
of financial statements for earlier periods provided for comprehensive purposes
is required.
YEAR 2000
The Company recognizes that there is a business risk in computerized
systems as a result of the change into the next century. The Federal Financial
Institutions Examination Council ("FFIEC") issued an interagency statement on
May 5, 1997, outlining five phases for institutions to effectively manage the
Year 2000 challenge. The phases were: Awareness; Assessment; Renovation;
Validation; and Implementation. The FFIEC encouraged institutions to have all
critical applications identified and priorities set by September 30, 1997 and
to have renovation work largely completed and testing well underway by December
31, 1998. The Company has a program designed to ensure that its operational
and financial systems will not be adversely affected by year 2000 software
failures, due to processing errors arising from calculations using the year
2000 date. The Board of Directors and management of the Company have
established year 2000 compliance as a strategic initiative. While the Company
believes that it has available resources to assure year 2000 compliance, it is
to some extent dependent on its outside core data processing servicer. At the
present time, the Company expects its core data processing provider vendor to
have all of its systems compliant by September 30, 1998. The testing of such
systems is expected to be substantially completed by December 31, 1998. The
Company has established time lines for testing all ancillary systems, such as
telephone systems and security devices by December 31, 1998. At this time, the
Company has identified approximately $6,000 in cost for making modifications
to correct year 2000 problems; however, the evaluation of all systems has not
been completed and additional cost may be identified. Cost to upgrade the core
operating system will be incurred by our data processing provider and it is
not anticipated that any additional cost incurred by the Company to upgrade
ancillary systems will materially differ from normal cost incurred during prior
years to upgrade and maintain systems.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Company and the Bank are primarily monetary
in nature. Therefore, interest rates have a more significant effect on the
Company's performance than do the effects of changes in the general rate of
inflation and change in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the
relationships between interest sensitive assets and liabilities in order to
protect against wide interest rate fluctuations, including those resulting from
inflation.
23
<PAGE> 25
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
<S> <C>
REPORT OF INDEPENDENT AUDITOR . . . . . . . . . . . . . . . . . . . . . . 25
BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 27
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . 28
STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . . 29
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 30-41
</TABLE>
24
<PAGE> 26
REPORT OF INDEPENDENT AUDITOR
The Board of Directors
First Community Corporation
Lexington, South Carolina
I have audited the accompanying balance sheets of First Community
Corporation as of December 31, 1997 and 1996, and the related statements of
operations, changes in shareholders' equity and cash flows for the three years
ended December 31, 1997. These financial statements are the responsibility of
management. My responsibility is to express an opinion on these financial
statements based on my audits.
I conducted the audit in accordance with generally accepted auditing
standards. Those standards require that I 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. I believe that my audits provide a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of First Community
Corporation at December 31, 1997 and 1996 and the results of its operations and
its cash flows for the three years ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Clifton D. Bodiford
Certified Public Accountant
Columbia, SC
January 8, 1998
25
<PAGE> 27
FIRST COMMUNITY CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
ASSETS ----------- -----------
<S> <C> <C>
Cash and due from banks $ 2,869,066 $ 1,975,527
Federal funds sold and securities purchased under
agreements to resell 2,620,000 5,752,272
Investment securities - available-for-sale 11,606,899 9,213,248
Investment securities - held-to-maturity (market value of
$1,894,940 and $2,562,844 at December 31, 1997 and 1996) 1,900,000 2,600,076
Loans 28,999,906 15,915,004
Less, allowance for loan losses 380,120 200,860
----------- -----------
Net loans 28,619,786 15,714,144
Property, furniture and equipment - net 2,983,224 2,544,140
Other assets 413,456 329,834
----------- -----------
Total assets $51,012,431 $38,129,241
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing demand $ 7,553,754 $ 6,043,599
NOW and money market accounts 12,020,414 5,963,086
Savings 6,052,584 7,154,307
Time deposits less than $100,000 10,247,650 6,731,697
Time deposits $100,000 and over 6,372,330 5,008,135
----------- -----------
Total deposits 42,246,732 30,900,824
Securities sold under agreements to repurchase 2,143,400 923,400
Other borrowed money - demand note to US Treasury 111,383 299,559
Other liabilities 396,063 223,352
----------- -----------
Total liabilities 44,897,578 32,347,135
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, par value $1.00 per share;
10,000,000 shares authorized; issued and outstanding
689,677 and 688,077 at December 31, 1997 and 1996, respectively 689,677 688,077
Additional paid in capital 6,155,237 6,140,837
Accumulated deficit (732,904) (984,080)
Unrealized gain (loss) on securities available-for-sale 2,843 (62,728)
----------- -----------
Total shareholders' equity 6,114,853 5,782,106
----------- -----------
Total liabilities and shareholders' equity $51,012,431 $38,129,241
=========== ===========
</TABLE>
See Notes to Financial Statements
26
<PAGE> 28
FIRST COMMUNITY CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Interest income:
Loans, including fees $2,184,512 $1,004,243 $ 57,223
Investment securities - available-for-sale 624,377 479,822 114,551
Investment securities - held-to maturity 157,403 155,504 21,885
Federal funds sold and securities purchased
under agreements to resell 227,747 130,463 62,894
Other, pre-opening - - 86,754
---------- ---------- ---------
Total interest income 3,194,039 1,770,032 343,307
---------- ---------- ---------
Interest expense:
Deposits 1,317,360 695,626 91,096
Securities sold under agreements to repurchase 70,007 48,095 7,174
Other 4,490 2,328 -
---------- ---------- ---------
Total interest expense 1,391,857 746,049 98,270
---------- ---------- ---------
Net interest income 1,802,182 1,023,983 245,037
Provision for loan losses 193,860 135,000 76,750
---------- ---------- ---------
Net interest income after provision for loan losses 1,608,322 888,983 168,287
---------- ---------- ---------
Non-interest income:
Deposit service charges 170,863 82,192 7,434
Mortgage origination fees 41,428 24,930 9,553
Other 49,779 18,803 2,582
---------- ---------- ---------
Total non-interest income 262,070 125,925 19,569
---------- ---------- ---------
Non-interest expense:
Salaries and employee benefits 876,091 704,416 250,902
Occupancy 114,008 129,978 58,218
Equipment 143,661 102,456 29,768
Marketing and public relations 90,197 35,596 27,317
Other 395,259 324,093 128,659
Pre-opening expense - - 250,826
---------- ---------- ---------
Total non-interest expense 1,619,216 1,296,539 745,690
---------- ---------- ---------
Net Income/(Loss) $ 251,176 $ (281,631) $(557,834)
========== ========== =========
Basic earnings/(loss) per common share $ 0.36 $ (0.41) $ (1.59)
========== ========== =========
Diluted earnings/loss per common share $ 0.36 $ (0.41) $ (1.59)
========== ========== =========
</TABLE>
See Notes to Financial Statements
27
<PAGE> 29
FIRST COMMUNITY CORPORATION
Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Unrealized
Additional Gain (Loss) on
Common Paid-in Accumulated Securities
Stock Capital Deficit Avail. for Sale Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 10 $ 90 $ (144,615) - $ (144,515)
Issuance of common stock 688,067 6,140,747 6,828,814
Net loss (557,834) (557,834)
Unrealized gain on securities
available-for-sale 9,040 9,040
--------- ----------- ---------- ------------ -----------
Balance December 31, 1995 688,077 6,140,837 (702,449) 9,040 6,135,505
Net loss (281,631) (281,631)
Unrealized loss on securities
available-for-sale (71,768) (71,768)
--------- ----------- ----------- ------------ -----------
Balance December 31, 1996 $ 688,077 $ 6,140,837 $ (984,080) $ (62,728) $ 5,782,106
Issuance of common stock 1,600 14,400 16,000
Net Income 251,176 251,176
Unrealized gain on securities
available-for-sale 65,571 65,571
--------- ----------- ---------- ------------ -----------
Balance December 31, 1997 $ 689,677 $ 6,155,237 $ (732,904) $ 2,843 $ 6,114,853
========= =========== ========== ============ ===========
</TABLE>
See Notes to Financial Statements
28
<PAGE> 30
FIRST COMMUNITY CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (loss) $ 251,176 $ (281,631) $ (557,834)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation 135,703 169,129 65,254
Amortization (accretion) of premium/discount (57,987) (4,070) 105
Provision for loan losses 193,860 135,000 76,750
Increase in other assets (83,623) (142,965) (145,438)
Increase (decrease) in accounts payable 171,112 114,060 (113,131)
----------- ----------- -----------
Net cash provided (used) in operating activities 610,241 (10,477) (674,294)
----------- ----------- -----------
Cash flows form investing activities:
Purchase of investment securities available-for-sale (7,680,975) (8,208,751) (15,403,531)
Maturity/call of investment securities available-for-sale 5,125,910 5,747,327 8,593,201
Sale of investment securities available-for sale 286,647
Purchase of investment securities held-to-maturity - (1,400,333) (2,600,000)
Maturity/call of investment securities held-to-maturity 700,000 1,000,000 400,000
Increase in loans (13,099,502) (12,092,752) (3,833,142)
Purchase of property and equipment (624,787) (1,191,345) (1,592,736)
Proceeds from sale of equipment 50,000 41,935
----------- ----------- -----------
Net cash used in investing activities (15,242,707) (16,103,919) (14,436,208)
----------- ----------- -----------
Cash flows from financing activities:
Increase in deposit accounts 11,345,908 19,566,884 11,333,940
Increase (decrease) in securities sold under
agreements to repurchase 1,220,000 (708,100) 1,631,500
Increase (decrease) in other borrowings (188,176) 130,198 169,361
Proceeds from sale of common stock 16,000 - 6,828,814
----------- ----------- -----------
Net cash provided from financing activities 12,393,732 18,988,982 19,963,615
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (2,238,734) 2,874,586 4,853,113
Cash and cash equivalents at beginning
of period 7,727,799 4,853,213 100
----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,489,065 $ 7,727,799 $ 4,853,213
=========== =========== ===========
Supplemental disclosure:
Cash paid during the period for:
Interest $ 1,280,508 $ 650,670 $ 59,834
Non-cash investing and financing activities:
Unrealized gain (loss) on securities available-
for-sale $ 65,571 $ (71,768) $ 9,040
</TABLE>
See Notes to Financial Statements
29
<PAGE> 31
FIRST COMMUNITY CORPORATION
Notes to Financial Statements
December 31, 1997
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
First Community Corporation and its wholly owned subsidiary
First Community Bank, N.A. (the Bank). All material
intercompany transactions are eliminated in consolidation. The
Company was organized on November 2, 1994 (the "Inception
Date"). From the Inception Date through August 16, 1995, the
Company was a development stage company. The activities during
this period included conducting the initial public offering,
the pursuit of approvals from various agencies to charter its
bank subsidiary, establishing systems, and hiring and training
personnel to open the Bank. Organizational costs in the amount
of $28,300 have been capitalized and are being amortized over a
period of five years.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The financial statements are prepared in accordance with
generally accepted accounting principles which require
management to make estimates and assumptions that effect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the reserve
for loan losses. The estimation process includes management's
judgment as to future losses on existing loans based on an
internal review of the loan portfolio, including an analysis of
the borrowers current financial position, the consideration of
current and anticipated economic conditions and the effect on
specific borrowers. In determining the collectibility of loans
management also considers the fair value of underlying
collateral. Various regulatory agencies, as an integral part of
their examination process, review the Company's allowance for
loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about
information available to them at the time of their examination.
Because of these factors it is possible that the allowance for
loan losses could change materially.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, due from
banks, federal funds sold and securities purchased under
agreements to resell. Generally federal funds are sold for a
one-day period and securities purchased under agreements to
resell mature in less than 90 days.
Investment Securities
Investment securities are classified as either held-to-maturity
or available-for-sale. In determining such classification,
securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to maturity and are
carried at amortized cost. All other securities are classified
as available-for-sale and carried at estimated fair values with
unrealized gains and losses included in shareholders' equity on
an after tax basis. At June 30, 1995, all investment securities
were classified
Gains and losses on the sale of available-for-sale securities
are determined using the specific identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other
than temporary result in write-downs of the individual
securities to their fair value.
30
<PAGE> 32
Premiums and discounts are recognized in interest income using
the interest method over the period to maturity.
Loans and Allowance for Loan Losses
Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal balance adjusted
for any charge-offs, the allowance for loan losses, and any
deferred fees or or costs on originated loans. Interest is
recognized over the term of the loan based on the loan balance
outstanding. Fees charged for originating loans, if any are
deferred and offset by the deferral of certain direct expenses
associated with loans originated. The net deferred fees are
recognized as yield adjustments by applying the interest
method.
The allowance for loan losses is maintained at a level believed
to be adequate by management to absorb potential losses in the
loan portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio,
economic conditions and volume, growth and composition of the
portfolio.
The accrual of interest on impaired loans is discontinued when.
in management's opinion , the borrower may be unable to meet
payments as they become due. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash
payments are received.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the asset's estimated useful life.
Income Taxes
A deferred income tax liability or asset is recognized for the
estimated future effects attributable to differences in the tax
bases of assets or liabilities and their reported amounts in
the financial statements as well as operating loss and tax
credit carryforwards. The deferred tax asset or liability is
measured using the enacted tax rate expected to apply to
taxable income in the period in which the deferred tax asset or
liability is expected to be realized.
Stock Based Compensation Cost
The Company applies Accounting Principles Board Opinion No. 25,
" Accounting for Stock Issued to Employees". Accordingly,
compensation cost for stock options is measured as the excess,
if any, of the market price of the Company's stock at the date
of the grant over the amount an employee must pay to acquire
the stock. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) was issued
in October 1995, and encourages but does not require, adoption
of a fair value method of accounting for employee stock based
compensation plans. See Note 12.
Earnings/Loss Per Share
During February 1997, Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128) was issued
and specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly
held common stock or potential common stock. SFAS 128 requires
entities with other than simple capital structures to present
basic and diluted per share amounts for income from continuing
operations and net income. Basic earnings per share is
calculated by the Company by dividing net income by the
weighted average number of shares outstanding during the
period. Diluted earnings per share is calculated by dividing
net income by the weighted average number of shares outstanding
plus the weighted average number of additional common shares
that would have been outstanding if the dilutive potential
common shares had been issued. Diluted earnings per share
include the effects of outstanding stock options issued by the
Company. See Note 13.
31
<PAGE> 33
Note 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment
securities are summarized below:
HELD-TO-MATURITY:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gain Loss Fair Value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Government agency securities $1,900,000 - $ 5,060 $1,894,940
===========================================================
December 31, 1996:
U.S. Government agency securities $2,600,076 - $ 37,232 $2,562,844
===========================================================
</TABLE>
AVAILABLE-FOR-SALE:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gain Loss Fair Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
US Treasury securities $ 5,792,837 $ 14,514 $ 3,162 5,804,189
US Government agency securities 5,656,591 8,068 14,979 5,649,680
Other 153,030 - - 153,030
------------------------------------------------------------
11,602,458 $ 22,582 $ 18,141 $11,606,899
============================================================
December 31, 1996:
US Treasury securities $ 4,738,586 $ 6,426 $ 20,803 $ 4,724,209
US Government agency securities 4,386,660 4,737 53,088 4,338,309
Other 150,730 - - 150,730
------------------------------------------------------------
$ 9,275,976 $ 11,163 $ 73,891 $ 9,213,248
============================================================
</TABLE>
The amortized cost and fair value of investment securities at
December 31, 1997, by contractual maturity, follow. Expected
maturities differ from contractual maturities because borrowers
may have the right to call or prepay the obligations with or
without pre-payment penalties.
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 500,000 $ 500,000 $ 3,585,343 $ 3,584,534
Due after one year through five years 1,400,000 1,394,940 7,864,083 7,869,365
Due after ten years - - 153,030 153,030
------------------------------------------------------------
$ 1,900,000 $1,894,940 $11,602,456 $11,606,929
============================================================
</TABLE>
Securities with an amortized cost of $3,090,468 and fair value
of $3,089,235 at December 31, 1997, were pledged to secure
public deposits, demand notes due the U.S. Treasury and
securities sold under agreements to repurchase. During the year
ended December 31, 1997, there were proceeds from the sale and
call of securities from the available-for-sale portfolio of
$586,647. Gross gains amounted to $2,345 and gross losses
amounted to $2,304. There were no sales of securities during
'the years ended December 31, 1996 and 1995.
32
<PAGE> 34
Note 4 - LOANS
Loans summarized by category are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 7,148,239 $2,837,396
Real estate - construction 2,005,911 791,758
Real estate - mortgage
Commercial 10,453,666 6,639,358
Residential 4,456,963 2,602,274
Consumer 4,880,202 2,761,621
Leases 54,925 282,597
----------------------------
$28,999,906 $15,915,004
============================
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Balance at the beginning of year $ 200,860 $ 76,750 $ -
Provision for loan losses 193,860 135,000 76,750
Charged off loans (17,357) (11,205) -
Recoveries 2,757 315 -
--------------------------------------------
Balance at end of year $ 380,120 $ 200,860 $ 76,750
============================================
</TABLE>
Loans outstanding to Bank directors, executive officers and
their related business interests amounted to $2,101,797 and
$1,754,550 at December 31, 1997 and 1996, respectively. Total
loans made during the year ended December 31, 1997 totalled
$1,026,548 and repayments totalled $679,301. Related party
loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time
for comparable transactions with an unrelated persons and
generally do not involve more than the normal risk of
collectibility.
Note 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------
<S> <C> <C>
Land $ 952,774 $ 952,774
Premises 1,742,438 1,207,204
Equipment 491,102 435,859
Construction in process - 83,694
----------------------------
3,186,314 2,679,531
Accumulated depreciation 203,090 135,391
----------------------------
$ 2,983,224 $ 2,544,140
============================
</TABLE>
Provision for depreciation included in operating expenses for
the years ended December 31, 1997, 1996, and 1995 amounted to
$135,703, $169,129 and $65,254, respectively.
33
<PAGE> 35
Note 6 - DEPOSITS
At December 31, 1997, the scheduled maturities of Certificates
of Deposits are as follows:
<TABLE>
<S> <C>
1998 $ 14,741,699
1999 1,231,753
2000 625,278
2001 21,250
-------------
$ 16,619,980
=============
</TABLE>
Note 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature
within one to four days from the transaction date. The weighted
average interest rate at December 31, 1997 and 1996, was 5.49%
and 4.96%, respectively. The maximum month-end balance during
1997 and 1996 was $2,492,800 and $1,198,800, respectively.
Note 8 - INCOME TAXES
The Company's accounting and reporting for the effect of income
taxes is in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
The realization of a deferred tax benefit by the Company
depends upon having sufficient taxable income of an appropriate
character in the carryforward periods. Under SFAS 109 deferred
tax assets are recognized for future deductible amounts
resulting from differences in the financial statement and tax
bases of assets and liabilities and operating loss
carryforwards. A valuation allowance is then established to
reduce that deferred tax asset to the level that it is "more
likely than not" that the tax benefit will be realized. At
December 31, 1997 and 1996 net deferred tax assets existed of
approximately $259,199 and $352,129, respectively. The deferred
tax assets have been offset by a valuation allowance.
Income tax expense for the years ended December 31, 1997,
1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Current
Federal $ - $ - $ -
State - - -
--------------------------------------
- - -
--------------------------------------
Deferred
Federal 85,141 (94,276) (183,961)
State 7,789 (8,551) (16,475)
--------------------------------------
92,930 (102,827) (200,436)
--------------------------------------
Change in valuation allowance (92,930) 102,827 200,436
--------------------------------------
Income tax expense $ - $ - $ -
======================================
</TABLE>
34
<PAGE> 36
A reconciliation from expected federal tax expense (benefit)
to effective income tax expense for the periods indicated are
as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Expected federal income tax
expense (benefit) $ 85,399 $ (95,755) (189,664)
State income tax net of federal
benefit 7,459 (8,365) (16,568)
Change in beginning of year
valuation allowance (92,930) 102,827 200,436
Other 72 1,293 5,796
----------------------------------------------
$ - $ - $ -
==============================================
</TABLE>
The following is a summary of the tax effects of temporary
differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------
<S> <C> <C>
Assets:
Provision for bad debts $136,808 $ 72,291
Deferred pre-opening cost 73,532 101,997
Net operating loss 52,911 208,285
Book depreciation in excess of tax depreciation - 12,235
Other 5,418 1,309
-------------------------------
Total deferred tax assets 268,669 396,117
Valuation reserve (259,199) (352,129)
-------------------------------
Net deferred tax asset 9,470 43,988
Liabilities:
Cash basis accounting for tax purposes 5,975 43,988
Tax depreciation in excess of book depreciation 1,897 -
Unrealized gain on securities available for sale 1,598 -
-------------------------------
Total deferred tax liabilities 9,470 43,988
-------------------------------
Net deferred tax asset recognized $ - $ -
===============================
</TABLE>
The Company has a net operating loss for income tax purposes at
December 31, 1997, of approximately $147,000. Net operating
losses will expire in the year 2011, if not previously
utilized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Note 9 -
Statement of Financial Accounting Standards No. 107,
"Disclosure about Fair Value of Financial Instruments" (SFAS
107), requires the Company to disclose estimated fair values
for its financial instruments. Fair value estimates, methods,
and assumptions are set forth below.
Cash and short term investments - The carrying amount of these
financial instruments (cash and due from banks, federal funds
sold and securities purchased under agreements to resell)
approximate fair value. All mature within 90 days and do not
present unanticipated credit concerns.
Investment Securities - Fair values 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.
35
<PAGE> 37
Loans - For certain categories of loans, such as variable rate
loans and other lines of credit, the carrying amount, adjusted
for credit risk, is a reasonable estimate of fair value as the
Company has the ability to reprice the loan as interest rate
changes occur. The fair value of other loans is estimated by
discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. As
discount rates are based on current loan rates as well as
management estimates, the fair values presented may not be
indicative of the value negotiated in an actual sale.
Accrued Interest Receivable - The fair value approximates the
carrying value.
Deposits - The fair value of demand deposits, savings accounts,
and money market accounts is the amount payable on demand at
the reporting date. The fair value of fixed-maturity
certificates of deposits is estimated by discounting the future
cash flows using rates currently offered for deposits of
similar remaining maturities.
Short Term Borrowings - the carrying value of short term
borrowings (securities sold under agrreements to repurchase and
demand notes to the U.S. Treasury) approximate fair value.
Accrued Interest Payable - The fair value approximates the
carrying value.
Commitments to Extend Credit - The fair value of these
commitments are immaterial because their underlying interest
rates approximate market.
The carrying amount and estimated fair value of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short term investments $ 5,489,066 $ 5,489,066 $ 7,727,799 $ 7,727,799
=======================================================
Investment securities:
Held-to-maturity $ 1,900,000 $ 1,894,940 $ 2,600,076 $ 2,562,844
Available-for-sale 11,606,899 11,606,899 9,213,248 9,213,248
-------------------------------------------------------
Total investment securities $13,506,899 $13,501,839 $11,813,324 $11,776,092
=======================================================
Loans
Adjustable rate $11,465,832 $11,465,832 $ 6,508,335 $ 6,508,335
Fixed rate 17,534,074 17,573,708 9,406,669 9,399,644
-------------------------------------------------------
Total loans 28,999,906 29,039,540 15,915,004 15,907,979
Allowance for loan losses 380,120 200,860 -
-------------------------------------------------------
Net loans $28,619,786 $29,039,540 $15,714,144 $15,907,979
=======================================================
Accrued interest receivable $ 339,455 $ 339,455 $ 274,315 $ 274,315
=======================================================
Financial liabilities:
Deposits
Non-interest bearing demand 7,553,754 7,553,754 6,043,599 6,043,599
NOW and money market accounts 12,020,414 12,020,414 5,963,086 5,963,086
Savings 6,052,584 6,052,584 7,154,307 7,154,307
Certificates of deposit 16,619,980 16,639,498 11,739,832 11,748,371
-------------------------------------------------------
Total deposits $42,246,732 $42,266,250 $30,900,824 $30,909,363
=======================================================
Short term borrowings $ 2,254,783 $ 2,254,783 $ 1,222,959 $ 1,222,959
=======================================================
Accrued interest payable $ 236,667 $ 236,667 $ 133,815 $ 133,815
=======================================================
</TABLE>
36
<PAGE> 38
Note 10 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF
CREDIT RISK
The Bank is 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. These
instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated
balance sheets.
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 is represented by the
contractual amount of these instruments. The Bank uses the same
credit policies in making commitments as for on-balance sheet
instruments. At December 31, 1997, the Bank had commitments to
extend credit of $6,823,651.
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 a
payment of a fee. Since commitments may expire without being
drawn upon, the total commitments 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
of the party. Collateral held varies but may include inventory,
property and equipment, residential real estate and income
producing commercial properties.
The primary market area served by the Bank is Lexington and
Richland Counties within the Midlands of South Carolina.
Management closely monitors its credit concentrations and
attempts to diversify the portfolio within its primary market
area. At December 31, 1997, management does not consider there
to be any significant credit concentration within the
portfolio. Although, the Bank's loan portfolio as well as
existing commitments reflect the diversity of its primary
market area, a substantial portion of its debtors ability to
honor their contracts is dependent upon the economic stability
of the area.
Note 11 - OTHER AND PRE-OPENING EXPENSES
A summary of the components of other non-interest expense is as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Data processing $ 96,143 $ 93,712 $ 32,617
Supplies 52,063 43,940 27,519
Telephone 22,385 22,630 7,735
Correspondent services 38,097 29,854 6,660
Insurance 32,380 22,100 7,803
Postage 21,863 13,051 1,817
Professional fees 35,585 35,942 13,791
Other 96,743 62,864 30,717
-------------------------------------------------------
$ 395,259 $ 324,093 $ 128,659
=======================================================
</TABLE>
37
<PAGE> 39
A summary of the components of pre-opening expenses for the
period ended December 31, 1995 is as follows:
<TABLE>
<S> <C>
Salaries and employee benefits $155,706
Consultant fees 13,125
Occupancy cost 10,046
Marketing 23,819
Supplies 19,334
Other 28,796
--------
$250,826
========
</TABLE>
Note 12 - STOCK OPTIONS
The Company has adopted the 1996 Stock Option Plan under which
an aggregate of 110,000 shares have been reserved for issuance
by the Company upon the grant of stock options or restricted
stock awards. The plan provides for the grant of options to key
employees and Directors as determined by a Stock Option
Committee made up of at least two members of the Board of
Directors. During the year ended December 31, 1996, 88,000
shares were granted, at an option price of $10.00 per share,
which are exercisable for a period of ten years from the date
of grant.
Stock option transactions for the year ended December 31, 1997
and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of
year 88,000 $ 10.00 $ -
Granted - - 88,000 10.00
Exercised (1,600) 10.00 - -
Forfeited (2,400) 10.00 - -
---------------------------------------------------
Outstanding at end of year 84,000 $ 10.00 88,000 $ 10.00
===================================================
Option exercisable at end of year 47,200 $ 10.00 32,000 $ 10.00
===================================================
</TABLE>
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" (SFAS 123) The
statement defines a fair value based method of accounting for
employee stock options granted after December 31, 1994.
However, SFAS 123 allows an entity to account for these plans
according to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), provided
pro forma disclosure of net income and earnings per share are
made as if SFAS 123 had been applied. The Company has elected
to use APB 25 and provide the required pro-forma disclosures.
Accordingly, no compensation cost has been recognized in the
financial statements for the Company's stock option plan.
38
<PAGE> 40
The following summarizes pro-forma data in accordance with SFAS
123:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
---------------------------
<S> <C> <C>
Net income, pro-forma $228,712 $ (321,951)
Basic earnings/loss per common share, pro-forma $ 0.33 $ (0.47)
Diluted earnings loss per common share, pro-forma $ 0.33 (0.47)
</TABLE>
The assumptions used in estimating compensation cost on a
pro-forma basis were: dividend yield of 0.6%, expected life of
six years, volatility of near 0% and risk free interest rate of
6.36%.
Note 13 - EMPLOYEE BENEFIT PLAN
The Company maintains a 401 (k) plan which covers substantially
all employees. Participants may contribute up to the maximum
allowed by the regulation. During 1997, the Company made a
discretionary profit sharing contribution to the plan in the
amount of $15,350. Beginning in 1998 the Company will match 50%
of an employees contribution up to 4.00% of the participants
contribution.
Note 14 - EARNINGS PER SHARE
The following reconciles the numerator and denominator of the
basic and diluted earnings per share computation:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Numerator (Included in basic and
diluted earnings per share) $251,176 $(281,631) $(557,834)
=====================================
Denominator
Weighted average common shares outstanding for:
Basic earnings per share 689,015 688,077 350,641
Dilutive securities:
Stock options - Treasury
stock method 14,276 3,615 -
-------------------------------------
Diluted earnings per share 703,291 691,692 350,641
=====================================
</TABLE>
The average market price used in calculating the assumed number
of shares issued for the years ended December 31, 1997 and 1996
was $12.00 and $10.50, respectively.
Note 15 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Bank is subject to various federal and state regulatory
requirements, including regulatory capital requirements.
Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary,
actions that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weighting, and other factors. The Bank is required to maintain
minimum Tier 1 capital, total risked based capital and Tier 1
leverage ratios of 4%, 8% and 3%, respectively.
39
<PAGE> 41
At December 31, 1997, the most recent notification from the
Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt
corrective action. To be well capitalized the Bank must
maintain minimum Tier 1 capital, Total risk-based capital and
Tier 1 leverage ratios of 6%, 10% and 5%, respectively. There
are no conditions or events since that notification that
management believes have changed the Bank's well capitalized
status. The Company will be required by the Federal Reserve to
meet the same guidelines once its consolidated assets exceed
$150 million.
The actual capital amounts and ratios for the Bank and the
Company are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
First Community Corporation
Tier 1 Capital $6,098,008 17.41% $5,823,834 27.37%
Total Risked Based Capital 6,478,008 18.49% 6,024,834 28.34%
Tier 1 Leverage 6,098,008 12.50% 5,823,834 27.84%
First Community Bank, NA
Tier 1 Capital $5,232,345 14.93% $4,982,000 23.41%
Total Risked Based Capital 5,612,345 16.02% 5,183,000 24.35%
Tier 1 Leverage 5,232,345 10.73% 4,982,000 14.79%
</TABLE>
The Company's dividend payments (when available) will be made
primarily from dividends received from the Bank. Under
applicable federal law, the Comptroller of the Currency
restricts national bank total dividend payments in any calendar
year to net profits of that year combined with retained net
profits for the two preceding years. At December 31, 1997,
there were no retained net profits free of such restriction.
PARENT COMPANY FINANCIAL INFORMATION
Note 16 -
The balance sheets, statements of operations and cash flows for
First Community Corporation (Parent Only) follow:
Condensed Balance Sheets
<TABLE>
<CAPTION>
At December 31,
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
Assets:
Cash on deposit $ 852 $ 3,302
Interest-bearing deposits with the Bank 878,486 857,173
Investment in Bank subsidiary 5,246,346 4,931,231
Other 480 350
---------------------------------
Total assets $6,126,164 $5,792,056
=================================
Liabilities:
Other 14,154 9,950
---------------------------------
Shareholders' equity 6,112,010 5,782,106
---------------------------------
Total liabilities and shareholders' equity $6,126,164 $5,792,056
=================================
</TABLE>
40
<PAGE> 42
- -------------------------------------------------------------------------------
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 39,445 $ 40,582 $ 16,983
---------------------------------------------------------
Expenses:
Other 40,655 22,446 13,158
---------------------------------------------------------
Equity in undistributed earnings (loss) of subsidiary 252,386 (299,767) (561,659)
---------------------------------------------------------
Net Income/(loss) $ 251,176 $ (281,631) $ (557,834)
=========================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows Year ended December 31,
---------------------------------- ---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income/(loss) $ 251,176 $ (281,631) $ (557,834)
Adjustments to reconcile net income/(loss) to net
cash used by operating activities
Increase in equity in undistributed (earnings) loss
of subsidiary - 1997 (252,386)
1996 299,767
1995 561,659
1994 144,615
Other-net 4,073 11,618 (146,633)
---------------------------------------------------------
Net cash provided (used) by operating activities 2,863 29,754 1,807
---------------------------------------------------------
Cash flows from investing activities:
Investment in subsidiary - - (6,000,000)
(Purchase) maturity of investment security available-
for sale - 749,688 (749,688)
---------------------------------------------------------
Net cash used by investing activities - 749,688 (6,749,688)
---------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 16,000 - 6,828,814
---------------------------------------------------------
Increase in cash and deposits with Bank 18,863 779,442 80,933
Cash and cash equivalent, beginning of period 860,475 81,033 100
---------------------------------------------------------
Cash and cash equivalent, end of period $ 879,338 $ 860,475 $ 81,033
=========================================================
</TABLE>
41
<PAGE> 43
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NOT APPLICABLE.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is set form under "Election of
Director" on pages 2 through 5 of the Registrant's Proxy Statement filed in
connection with the 1998 Annual Meeting of Shareholders (the "1998 Proxy
Statement"), which information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item is set forth under "Compensation
of Directors and Executive Officers" on pages 5 through 7 of the 1998 Proxy
Statement, which information is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is set forth under "Security
Ownership of Certain Beneficial Owners and Management" on pages 8 through 9 of
the 1998 Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is set forth under "Certain
Relationships and Related Transactions" on page 10 of the 1998 Proxy Statement,
which information is incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
3.1 Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No. 33-86258 on Form
S-1).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement No. 33-86258 on
Form S-1).
4.1 Provisions in the Company's Articles of Incorporation
and Bylaws defining the rights of holders of the
Company's Common Stock (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement
No. 33-86258 on Form S-1).
42
<PAGE> 44
10.1 Employment Agreement dated June 1, 1994, by and
between Michael C. Crapps and the Company
(incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement No. 33-86258 on Form
S-1).*
10.2 Employment Agreement dated June 1, 1994, by and
between James C. Leventis and the Company
(incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 33-86258 on Form
S-1).*
10.3 Construction agreement dated January 11, 1996 by and
between the Bank and Summerfield Associates, Inc. To
build permanent banking facility in Lexington, S.C.
(Incorporated by reference to the Company's 1995
Annual Report on Form 10 KSB)
10.4 Contract of sale of real estate dated August 1, 1994
between First Community Bank (In Organization) and
Three Seventy-Eight Company, Inc. (Incorporated by
reference to the company's registration statement no.
33-86258 on Form S-1).
10.5 Contract of sale of real estate dated July 28, 1994,
between First Community Bank (In Organization) and
the Crescent Partnership (Incorporated by reference
to the Company's registration statement no. 33-86258
on Form S-1).
10.6 First Community Corporation 1996 Stock Option Plan.
(Incorporated by reference to the Company's 1995
Annual Report on Form 10 KSB)
10.7 Construction Agreement dated November 7, 1996 by and
between the Bank and Summerfield Associates, Inc. to
build a banking facility in Forest Acres, South
Carolina (Incorporated by reference to the Company's
1996 Annual Report on Form 10 KSB).
21.1 Subsidiaries of the Company.
27 Financial Data Schedule (for SEC use only).
* Denotes executive compensation contract or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1997.
43
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
First Community Corporation
------------------------------------------
Date: March 25, 1998 By: /s/ Michael C. Crapps
---------------------------------------
Michael C. Crapps
President and Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard K. Bogan Director March 25, 1998
----------------------------------
Richard K. Bogan
/s/ William L. Boyd, III Director March 25, 1998
----------------------------------
William L. Boyd, III
/s/ Thomas C. Brown Director March 25, 1998
----------------------------------
Thomas C. Brown
/s/ Chimin J. Chao Director March 25, 1998
----------------------------------
Chimin J. Chao
/s/ Robert G. Clawson Director March 25, 1998
----------------------------------
Robert G. Clawson
/s/ Michael C. Crapps Director, President and Chief March 25, 1998
---------------------------------- Executive Officer
Michael C. Crapps
/s/ Hinton G. Davis Director March 25, 1998
----------------------------------
Hinton G. Davis
/s/ Anita B. Easter Director March 25, 1998
----------------------------------
Anita B. Easter
/s/ O.A. Ethridge Director March 25, 1998
----------------------------------
O.A. Ethridge
/s/ George H. Fann, Jr. Director March 25, 1998
----------------------------------
George H. Fann, Jr.
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William A. Jordan Director March 25, 1998
----------------------------------
William A. Jordan
/s/ W. James Kitchens, Jr. Director March 25, 1998
----------------------------------
W. James Kitchens, Jr.
/s/ James C. Leventis Director, Chairman of the Board and March 25, 1998
---------------------------------- Secretary
James C. Leventis
/s/ Broadus Thompson Director March 25, 1998
----------------------------------
Broadus Thompson
/s/ Angelo L. Tsiantis Director March 25, 1998
----------------------------------
Angelo L. Tsiantis
/s/ Loretta R. Whitehead Director March 25, 1998
----------------------------------
Loretta R. Whitehead
/s/ Mitchell M. Willoughby Director March 25, 1998
----------------------------------
Mitchell M. Willoughby
</TABLE>
45
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
First Community Bank, N.A.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 CONTAINED IN FORM 10KSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,869,066
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,620,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,606,899
<INVESTMENTS-CARRYING> 1,900,000
<INVESTMENTS-MARKET> 1,894,940
<LOANS> 28,999,906
<ALLOWANCE> 380,120
<TOTAL-ASSETS> 51,012,431
<DEPOSITS> 42,246,732
<SHORT-TERM> 2,143,400
<LIABILITIES-OTHER> 507,446
<LONG-TERM> 0
0
0
<COMMON> 689,677
<OTHER-SE> 5,425,176
<TOTAL-LIABILITIES-AND-EQUITY> 51,012,431
<INTEREST-LOAN> 2,184,512
<INTEREST-INVEST> 781,780
<INTEREST-OTHER> 227,747
<INTEREST-TOTAL> 3,194,039
<INTEREST-DEPOSIT> 1,317,360
<INTEREST-EXPENSE> 1,391,857
<INTEREST-INCOME-NET> 1,802,182
<LOAN-LOSSES> 193,860
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,619,216
<INCOME-PRETAX> 251,176
<INCOME-PRE-EXTRAORDINARY> 251,176
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 251,176
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 4.44
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 200,860
<CHARGE-OFFS> 17,357
<RECOVERIES> 2,757
<ALLOWANCE-CLOSE> 380,120
<ALLOWANCE-DOMESTIC> 380,120
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
