FIRST COMMUNITY CAPITAL CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 000-32609

FIRST COMMUNITY CAPITAL CORPORATION

(Exact name of small business issuer as specified in its charter)

Texas

76-0676739

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

14200 Gulf Freeway

Houston, Texas 77034

(Address of principal executive offices, including zip code)

(281) 996-1000

(Issuer’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 31, 2004, there were 2,900,291 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

FIRST COMMUNITY CAPITAL CORPORATION

INDEX TO FORM 10-Q


			Page
PART I - FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

		Consolidated Statements of Condition as of June 30, 2004 (Unaudited) and December 31, 2003	3

		Consolidated Statements of Earnings for the Three Months and Six Months Ended June 30, 2004 and 2003 (Unaudited)	4

		Consolidated Statements of Comprehensive (Loss) Income for the Three Months and Six Months Ended June 30, 2004 and 2003 (Unaudited)	6

		Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2004 and 2003 (Unaudited)	7

		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited)	8

		Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations		13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29

Item 4.	Controls and Procedures		30

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		30

Item 2.	Changes In Securities Use Of Proceeds and Issuer Repurchases of Equity Securities		30

Item 3.	Defaults Upon Senior Securities		30

Item 4.	Submission Of Matters To A Vote Of Security Holders		31

Item 5.	Other Information		31

Item 6.	Exhibits And Reports On Form 8-K		31

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this quarterly report on Form 10-Q of First Community Capital Corporation (the “Company”) that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe the Company’s future plans, strategies and expectations, are based on assumptions and involve a number of risks and uncertainties, many of which are beyond the Company’s control. The important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

•

changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations;

•

changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio;

•

changes in local economic and business conditions which adversely affect the Company’s customers and their ability to transact profitable business with the Company, including the ability of the Company’s borrowers to repay their loans according to their terms or a change in the value of the related collateral;

•

increased competition for deposits and loans adversely affecting rates and terms;

•

the timing, impact and other uncertainties of the Company’s ability to enter new markets successfully and capitalize on growth opportunities;

•

increased credit risk in the Company’s assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio;

•

the failure of assumptions underlying the establishment of and provisions made to the allowance for possible credit losses;

•

changes in the availability of funds resulting in increased costs or reduced liquidity;

•

increased asset levels and changes in the composition of assets and the resulting impact on the Company’s capital levels and regulatory capital ratios;

•

the Company’s ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes;

•

the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels; and

•

changes in statutes and government regulations or their interpretations applicable to banks and the Company’s present and future subsidiaries, including changes in tax requirements and tax rates.

The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable cautionary statements.

FIRST COMMUNITY CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003


	June 30, 2004			December 31, 2003
	June 30, 2004			December 31, 2003
ASSETS
Cash and non-interesting bearing due from banks	$	25,986,254		$	24,304,702
Federal funds sold		72,089			—

Total cash and cash equivalents		26,058,343			24,304,702

Securities available for sale		104,950,856			116,096,938
Interest-bearing deposits in financial institutions		433,922			8,265,835
Other investments		3,000,000			290,000

Loans and leases, net of unearned fees		375,500,342			287,439,012
Less allowance for possible credit losses		(3,834,858	)		(2,929,852	)

Loans and leases, net		371,665,484			284,509,160

Bank premises and equipment, net		12,018,291			11,074,480
Accrued interest receivable		1,945,504			1,753,559
Federal Home Loan Bank stock		3,205,200			2,590,400
Federal Reserve Bank stock		1,108,299			619,300
Texas Independent Bank stock		50,000			40,000
Bank owned life insurance		9,324,334			8,698,334
Other real estate owned		2,576,272			924,208
Goodwill		12,133,687			6,578,425
Core deposit intangible		2,372,997			1,719,959
Other assets		2,332,104			1,773,137

	$	553,175,293		$	469,238,437

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest-bearing	$	130,665,877		$	94,707,239
Interest-bearing		314,870,677			272,588,789

Total Deposits		445,536,554			367,296,028

Federal Home Loan Bank borrowings		51,564,570			43,764,570
Accrued interest payable and other liabilities		831,127			1,725,002
Junior subordinated debentures		18,000,000			18,000,000

Total Liabilities		515,932,251			430,785,600

Stockholders’ Equity
Preferred stock, Series A		3,850			3,850
Preferred stock, Series B		3,757			3,757
Common stock		29,131			28,900
Treasury stock, at par		(128	)		(128	)
Capital surplus		34,837,011			34,576,191
Retained earnings		4,857,525			4,426,212
Accumulated other comprehensive loss		(2,488,104	)		(585,945	)

Total Stockholders’ Equity		37,243,042			38,452,837

	$	553,175,293		$	469,238,437

See accompanying notes.

FIRST COMMUNITY CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003


	2004			2003
INTEREST INCOME
Interest and fees on loans and leases	$	5,836,184		$	4,761,047
Securities available for sale		994,270			1,062,728
Other investments		76,006			39,031
Federal funds sold		11,669			2,106

Total Interest Income		6,918,129			5,864,912

INTEREST EXPENSE
Deposits		1,350,318			1,217,524
Subordinated debentures		272,366			—
Other borrowed funds		213,205			242,745

Total Interest Expense		1,835,889			1,460,269

NET INTEREST INCOME		5,082,240			4,404,643
PROVISION FOR POSSIBLE CREDIT LOSSES		(400,000	)		(450,000	)

NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES		4,682,240			3,954,643

NON-INTEREST INCOME
Service charges		1,067,752			928,293
Gain on sales of securities		39			113,642
Other		175,459			333,321

Total Non-Interest Income		1,243,250			1,375,256

NON-INTEREST EXPENSE
Salaries and employee benefits		2,598,026			1,954,497
Net occupancy and equipment expense		1,015,751			645,317
Professional and outside service fees		651,047			619,259
Office expenses		432,576			239,746
Minority interest expense, trust preferred securities		—			191,523
Other		937,078			1,034,475

Total Non-Interest Expense		5,634,478			4,684,817

EARNINGS BEFORE INCOME TAXES		291,012			646,082
INCOME TAXES		30,460			135,218

NET EARNINGS	$	260,552		$	510,864

NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS	$	172,964		$	423,276

BASIC EARNINGS PER COMMON SHARE	$	0.06		$	0.15

DILUTED EARNINGS PER COMMON SHARE	$	0.05		$	0.14

See accompanying notes.

FIRST COMMUNITY CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003


	2004			2003
INTEREST INCOME
Interest and fees on loans and leases	$	11,362,523		$	9,476,737
Securities available for sale		2,134,445			1,967,933
Other investments		102,532			101,003
Federal funds sold		28,653			30,735

Total Interest Income		13,628,153			11,576,408

INTEREST EXPENSE
Deposits		2,640,321			2,558,569
Subordinated debentures		538,139			—
Other borrowed funds		438,606			475,264

Total Interest Expense		3,617,066			3,033,833

NET INTEREST INCOME		10,011,087			8,542,575
PROVISION FOR POSSIBLE CREDIT LOSSES		(875,001	)		(925,000	)

NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES		9,136,086			7,617,575

NON-INTEREST INCOME
Service charges		2,088,595			1,765,401
Gain on sales of securities		66,400			246,814
Other		312,099			476,000

Total Non-Interest Income		2,467,094			2,488,215

NON-INTEREST EXPENSE
Salaries and employee benefits		5,052,529			3,724,532
Net occupancy and equipment expense		1,994,911			1,230,750
Professional and outside service fees		1,269,765			1,012,016
Office expenses		770,414			505,806
Minority interest expense, trust preferred securities		—			383,437
Other		1,834,322			1,764,526

Total Non-Interest Expense		10,921,941			8,621,067

EARNINGS BEFORE INCOME TAXES		681,239			1,484,723
INCOME TAXES		74,751			322,491

NET EARNINGS	$	606,488		$	1,162,232

NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS	$	431,313		$	987,057

BASIC EARNINGS PER COMMON SHARE	$	0.15		$	0.35

DILUTED EARNINGS PER COMMON SHARE	$	0.13		$	0.33

See accompanying notes.

FIRST COMMUNITY CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003


	Three Months Ending June 30,
	2004			2003
NET EARNINGS	$	260,552		$	510,864
OTHER COMPREHENSIVE LOSS, NET OF TAX
Unrealized loss on available for sale securities		(2,599,604	)		(18,941	)

COMPREHENSIVE (LOSS) INCOME	$	(2,339,052	)	$	491,923


	Six Months Ending June 30,
	2004			2003
NET EARNINGS	$	606,488		$	1,162,232
OTHER COMPREHENSIVE LOSS, NET OF TAX
Unrealized loss on available for sale securities		(1,902,159	)		(178,999	)

COMPREHENSIVE (LOSS) INCOME	$	(1,295,671	)	$	983,233

See accompanying notes.

FIRST COMMUNITY CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003


	June 30, 2004 (Unaudited)
	Preferred Stock Series A		Preferred Stock Series B		Common Stock		Treasury Stock			Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance - December 31, 2003	$	3,850	$	3,757	$	28,900	$	(128	)	$	34,576,191	$	4,426,212		$	(585,945	)	$	38,452,837
Issuance of Common Stock (23,170 shares)		—		—		231		—			260,820		—			—			261,051
Net Earnings		—		—		—		—			—		606,488			—			606,488
Unrealized Loss on Securities		—		—		—		—			—		—			(1,902,159	)		(1,902,159	)

Total Comprehensive Loss		—		—		—		—			—		—			—			(1,295,671	)
Dividends Paid		—		—		—		—			—		(175,175	)		—			(175,175	)

Balance - June 30, 2004	$	3,850	$	3,757	$	29,131	$	(128	)	$	34,837,011	$	4,857,525		$	(2,488,104	)	$	37,243,042


	June 30, 2003 (Unaudited)
	Preferred Stock Series A		Preferred Stock Series B		Common Stock		Treasury Stock			Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance - December 31, 2002	$	3,850	$	—	$	28,600	$	(128	)	$	28,757,665	$	3,000,384		$	541,219		$	32,331,590
Issuance of Common Stock (12,000 shares)		—		—	$	120		—		$	70,380		—			—			70,500
Net Earnings		—		—		—		—			—		1,162,232			—			1,162,232
Unrealized Loss on Securities		—		—		—		—			—		—			(178,999	)		(178,999	)

Total Comprehensive Income		—		—		—		—			—		—			—			983,233
Dividends Paid		—		—		—		—			—		—			—			—

Balance - June 30, 2003	$	3,850	$	—	$	28,720	$	(128	)	$	28,828,045	$	4,162,616		$	362,220		$	33,385,323

See accompanying notes.

FIRST COMMUNITY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003


	(Unaudited)
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	606,488		$	1,162,232

Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for possible credit losses		875,001			925,000
Provision for depreciation		648,325			483,414
Amortization of core deposits		244,657			194,712
Amortization and accretion of premiums and discounts on investment securities, net		459,530			619,428
Gain on sale of investment securities, net		(66,400	)		(246,814	)
Change in operating assets and liabilities:
Accrued interest receivable		28,126			2,080
Other real estate owned		(653,927	)		(1,207,024	)
Other assets		(254,319	)		36,501
Accrued interest payable and other liabilities		(989,957	)		(98,295	)

Total adjustments		291,036			709,002

Net cash provided by operating activities		897,524			1,871,234

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and sales of investment securities		29,651,830			71,150,811
Purchases of investment securities		(19,398,835	)		(89,408,060	)
Decrease in deposits in financial institutions		7,831,913			—
Purchase of other investments		(2,710,000	)		—
Net increase in loans		(53,363,182	)		(2,333,843	)
Purchases of bank premises and equipment		(897,906	)		(864,310	)
Purchase of Federal Home Loan Bank stock		(335,200	)		(24,000	)
Purchased/Sold of Federal Reserve Bank stock		(488,999	)		6,000
Community State Bank acquisition		(9,812,338	)		—
Cash from acquisition of Community State Bank		12,583,756			—
Change in cash surrender value of bank owned life insurance		(626,000	)		(283,594	)

Net cash used by investing activities		(37,564,961	)		(21,756,996	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of federal funds purchased		—			(4,000,000	)
Federal Home Loan Bank borrowings		7,800,000			4,700,000
Proceeds from sale of common stock		261,051			70,500
Net increase in noninterest-bearing deposits		20,705,503			1,667,271
Net increase in interest-bearing deposits		9,829,699			14,787,958
Dividends paid		(175,175	)		—

Net cash provided by financing activities		38,421,078			17,225,729

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,753,641			(2,660,033	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		24,304,702			32,706,858

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	26,058,343		$	30,046,825

See accompanying notes.

FIRST COMMUNITY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND 2003

NOTE A

BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations adopted by the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the entire year or any interim period. For further information, refer to the financial statements and notes thereto included in the annual report on Form 10-KSB of First Community Capital Corporation for the year ended December 31, 2003.

TRUST PREFERRED SECURITIES

Statement of Financial Accounting Standard No. 150 (“Statement 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” establishes standards for how an issuer classifies, measures and discloses in its financial statements certain financial instruments with characteristics of both liabilities and equity. Statement 150 requires that an issuer classify financial instruments that are within its scope as a liability, in most circumstances. Effective July 1, 2003, the Company adopted Statement 150 which resulted in the reclassification at that time of the trust preferred securities and the related interest costs. Statement 150 required the reclassification of the Company-obligated mandatorily redeemable trust preferred securities of the subsidiary trust, commonly known as trust preferred securities, from the mezzanine section of the Consolidated Statement of Condition to borrowings and the related interest expense in the Consolidated Statement of Earnings from non-interest expense to interest expense as of July 1, 2003. Prior to this date, the interest expense related to these securities was treated as minority interest expense on the Consolidated Statement of Earnings and not included in the calculation of the net interest income or net interest margin. For all periods prior to July 1, 2003, amounts previously recognized as minority interest expense on trust preferred securities are not reclassified to interest expense under the standard.

In December 2003, the FASB issued Interpretation No. 46R, “Consolidation of Variable Interest Entities” (FIN 46R). FIN 46R provides guidance on how to identify a variable interest entity and determine when the assets, liabilities, non-controlling interest and results of operations of a variable interest entity need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will consolidate the entity if the company’s interest in the variable interest entity is such that the company will absorb a majority of the variable interest entity’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. As of June 30, 2004, the Company had no investments in variable interest entities requiring consolidation. FIN 46R will, however, require that the trusts that issued the Company’s outstanding company obligated mandatorily redeemable trust preferred securities be deconsolidated from the consolidated financial statements. The Company adopted FIN 46R on January 1, 2004. These trust preferred securities are no longer shown in the consolidated financial statements. Instead, the junior subordinated debentures issued by the Company to these trusts are shown as liabilities in the consolidated financial statements and interest expense associated with the junior subordinated debentures is shown in the consolidated statements of income. Compliance with FIN 46R has no substantive effect on the Company’s total liabilities, equity or results of operations.

STOCK OPTIONS

Statement of Financial Accounting Standards No. 148 (“Statement 148”) “Accounting for Stock-Based Compensation-Transition and Disclosure” was issued in December 2002. Statement 148 amends FASB No. 123 “Accounting for Stock-Based Compensation” (“Statement 123”) to provide alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. First Community Capital Corporation has adopted only the disclosure provisions included in Statement 148, which are included in the notes to the consolidated financial statements for the three and six months ending June 30, 2004 and 2003.

FIRST COMMUNITY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND 2003

As provided in Statement 123, the Company accounts for its stock compensation programs in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under this method no stock-based compensation expense is reflected in net income, as all options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of Statement 123 as amended by Statement 148.


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net Earnings, as reported	$	260,552		$	510,864		$	606,488		$	1,162,232
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of all tax effects		(54,648	)		(36,656	)		(109,295	)		(73,312	)
Undeclared Dividends on Preferred Stock		(87,588	)		(87,588	)		(175,175	)		(175,175	)

Pro Forma Net Earnings Available to Common Stockholders	$	118,316		$	386,620		$	322,018		$	913,745

Earnings Per Share:
Basic-as reported less undeclared dividends on preferred stock	$	0.06		$	0.15		$	0.15		$	0.35
Basic-pro forma	$	0.04		$	0.14		$	0.11		$	0.32
Diluted-as reported less undeclared dividends on preferred stock	$	0.05		$	0.14		$	0.13		$	0.33
Diluted-pro forma	$	0.04		$	0.13		$	0.10		$	0.31

Weighted Average Shares Used to Compute EPS:
Basic		2,887,460			2,855,956			2,883,401			2,851,563
Diluted		3,369,842			2,966,956			3,372,560			2,962,563

PREFERRED STOCK

During 2002, the Company authorized 2,000,000 shares of its $0.01 par value preferred stock. The Company then established a series of preferred stock known as the 7% Series A Mandatory Convertible Preferred Stock, which is non-voting, mandatorily convertible, non-cumulative preferred stock and at June 30, 2004 384,999 shares were issued and outstanding. Dividends equal to 7% of the liquidation price ($13.00 per share) are to be paid semi-annually if, as and when declared.

During 2003, the Company established the Series B Mandatorily Convertible Preferred Stock, $.01 par value, which is non-voting and does not pay a dividend. At June 30, 2004 375,654 shares were issued and outstanding. The proceeds of the Offering are being used for general corporate purposes, including the expansion of the Company’s operations in San Antonio, Texas. These shares are automatically convertible on the second anniversary date of the opening of the Company’s San Antonio office (September 15, 2005) into one share of common stock. However, if the San Antonio office meets certain incentive goals as outlined in the Offering Memorandum prior to the second anniversary of the office opening date, each share will be converted into 1.06 shares of common stock at such anniversary date. Prior to conversion into common stock, these shares will have a liquidation preference of $5,634,810 prior to any liquidating distribution to holders of common stock.

FIRST COMMUNITY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND 2003

NOTE B

EARNINGS PER COMMON SHARE

Earnings per common share (“EPS”) were computed as follows:


	Three Months Ended June 30
	2004					2003
	Amount			Per Share		Amount			Per Share
Net Earnings	$	260,552				$	510,864
Less undeclared dividends on preferred stock		(87,588	)				(87,588	)

Net earnings available to common shareholders	$	172,964				$	423,276

Basic
Weighted Average Shares outstanding		2,887,460		$	0.06		2,855,956		$	0.15

Diluted
Add incremental shares for:
Conversion of dilutive stock options		106,728					111,000
Conversion of preferred stock, series B		375,654					—

	$	3,369,842		$	0.05	$	2,966,956		$	0.14


	Six Months Ended June 30
	2004					2003
	Amount			Per Share		Amount			Per Share
Net Earnings	$	606,488				$	1,162,232
Less undeclared dividends on preferred stock		(175,175	)				(175,175	)

Net earnings available to common shareholders	$	431,313				$	987,057

Basic
Weighted Average Shares outstanding		2,883,401		$	0.15		2,851,563		$	0.35

Diluted
Add incremental shares for:
Conversion of dilutive stock options		113,505					111,000
Conversion of preferred stock, series B		375,654					—

		3,372,560		$	0.13		2,962,563		$	0.33

FIRST COMMUNITY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND 2003

NOTE C

STATEMENTS OF CASH FLOWS

Interest payments of $4,952,917 and $3,101,770 were made during the six-month periods ended June 30, 2004 and 2003, respectively. The Company made federal income tax payments of $100,000 and $275,000 during the six-month periods ended June 30, 2004 and 2003, respectively.

NOTE D

ACQUISITIONS

On January 6, 2004, the Company completed its previously announced acquisition of Grimes County Capital Corporation, a Texas corporation and the parent company of Community State Bank, for aggregate consideration of $9.5 million in cash. Community State Bank’s locations include its main office on Scarsdale in Houston, a branch on Dairy Ashford in Houston and a branch in Iola, Texas, which is approximately 130 miles north of Houston. On April 30, 2004 the Company completed the conversion of Community State Bank to a national bank and is operating it as a separate subsidiary of the Company, headquartered in San Antonio, Texas. As part of this process, First Community Bank purchased substantially all the assets and assumed the liabilities of Community State Bank and transferred the deposits and assets associated with the San Antonio branch office located at 14100 San Pedro, Suite 100, San Antonio, Texas, to Community State Bank which then converted to a national bank known as First Community Bank San Antonio, N.A.

The acquisition of Grimes County resulted in the recognition of $5,555,262 in goodwill and $898,000 in a core deposit intangible. Under Statement of Financial Accounting Standards No. 142, the goodwill recorded as a result of the Community State Bank acquisition will be periodically tested for impairment and written down to fair value if considered impaired. The core deposit intangible will be amortized based upon a calculated attrition rate over ten years.

The results of operations of Grimes County are effectively reflected in the June 30, 2004 consolidated statement of earnings as presented due to the early January 2004 date of acquisition and therefore no supplemental pro forma information is presented for the period ending June 30, 2004. Supplemental pro forma information for the period ending June 30, 2003 is not presented as the impact on consolidated earnings for that period is not deemed material by management.

As a result of the acquisition, the Company has assumed a potential $3.0 million tax liability of Grimes County Capital Corporation, which is unresolved and unrecorded at June 30, 2004. The Company intends to determine its filing position with regard to this potential tax liability during the third quarter of 2004. If the issue is resolved unfavorably to the Company, it would have a negative impact on earnings.

Pursuant to the terms of the purchase agreement, the Company is holding approximately $106,000 for the benefit of the selling Community State Bank shareholders. This amount is included in other liabilities on the consolidated statements of condition. Under this agreement, a portion of this amount will be paid to the former Community State Bank shareholders after specified non-performing assets have been paid off or deemed to be paying as agreed without risk of loss to the Company over a period of 24 months from the date of acquisition. At the expiration of the escrow agreement, amounts held in escrow specifically assigned to nonperforming assets that have not satisfactorily been resolved and continue to present a risk of loss to the Company will become the property of the Company.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company was incorporated as a business corporation under the laws of the State of Texas in January 2001 to serve as a bank holding company for First Community Bank, N.A. (the “Bank”). In January 2004, the Company acquired Grimes County Capital Corporation and its wholly-owned subsidiary, Community State Bank located in Houston, Texas. At December 31, 2003, Community State Bank had approximately $51.9 million in total assets, $35.3 million in loans, $47.7 million in deposits and total stockholders’ equity of $4.0 million. The Company owns the Bank and Community State Bank, now known as First Community Bank San Antonio, N.A. (together with First Community Bank, N.A., the “Banks”), through its wholly owned Delaware subsidiary, First Community Capital Corporation of Delaware, Inc. (the “Delaware Company”). The Company, through the Banks, provides a diversified range of commercial banking products and services to small and medium-sized businesses, public and governmental organizations and consumers through 17-full-service banking locations in or near Houston, Texas and two full-service banking location in San Antonio, Texas.

Recent Developments

On April 30, 2004 the Company completed its plans to convert Community State Bank to a national bank and operate it as a separate subsidiary of the Company headquartered in San Antonio, Texas. As part of this process, the Bank purchased substantially all the assets and assumed the liabilities of Community State Bank and transferred the Bank’s deposits and assets associated with the San Antonio branch office located at 14100 San Pedro, Suite 100, San Antonio, Texas, to Community State Bank which then converted to a national bank known as First Community Bank San Antonio, N.A. First Community Bank San Antonio, N.A. shares several officers and directors with the Bank but also has directors, executive officers and staff from the San Antonio area who are familiar with such market and have previously managed other banks in the area.

Overview

For the three months ended June 30, 2004 net earnings were $260.6 thousand, a $250.3 thousand or 49.0%decrease compared with net earnings of $510.9 thousand for the three months ended June 30, 2003. For the six months ended June 30, 2004 net earnings were $606.5 thousand, a $593.5 thousand or 49.5%decrease compared with net earnings of $1.2 million for the six months ended June 30, 2003. The acquisition of Community State Bank, and conversion related costs, the Baybrook branch opening, the opening of our newest San Antonio branch and the associated additional overhead expense were major contributors to the reduced earnings.

Total assets were $553.2 million at June 30, 2004 compared with $469.2 million at December 31, 2003, an increase of $84.0 million or 17.9%. Total loans and leases, net of unearned discount and fees and allowance for possible credit losses, increased to $371.6 million at June 30, 2004 from $284.5 million at December 31, 2003, an increase of $87.1 million or 30.6%. Total deposits were $445.5 million at June 30, 2004 compared with $367.3 million at December 31, 2003, an increase of $78.2 million or 21.3%. The increases are primarily the result of the acquisition of Community State Bank on January 6, 2004. Stockholders’ equity decreased approximately $1.2 million during the six month period ended June 30, 2004 compared with year-end 2003, primarily the result of the change in the value of the investment securities portfolio which was partially offset by current year earnings.

Critical Accounting Policies

The Company’s accounting policies are integral to understanding the results reported. The Securities and Exchange Commission (“SEC”) recently issued guidance for the disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and operating results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles as more fully discussed in its Form 10-KSB for the year ended December 31, 2003. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, the policies noted below could be deemed to meet the SEC’s definition of critical accounting policies.

Allowance for Possible Credit Losses - The allowance for possible credit losses is a reserve established through charges to earnings in the form of a provision for possible credit losses. Management has established an allowance for possible credit losses, which it believes is adequate for estimated losses in the Company’s loan and lease portfolio. Based on an evaluation of the loan and lease portfolio, management presents a quarterly review of the allowance for possible credit losses to the Company’s Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. In making its evaluation, management considers factors such as historical loan loss experience, industry diversification of the Company’s commercial loan portfolio, the amount of non-performing assets and related collateral, the volume, growth and composition of the Company’s loan and lease portfolio, current economic changes that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the Company’s loan and lease portfolio through its internal and external loan review process and other relevant factors. Charge-offs occur when loans are deemed to be un-collectible.

Stock–based Compensation – The Company accounts for stock-based employee compensation plans using the intrinsic value-based method. Because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized on options granted. Pro forma disclosures of net income and earnings per share assuming the fair value-based accounting method are set forth in Note A to the Company’s interim unaudited Consolidated Financial Statements included herein for the period ended June 30, 2004.

The Financial Accounting Standards Board (the “FASB”) is currently working on a project to address issues related to equity-based compensation. The objective of the project is to achieve convergence with international standards setting bodies on one single, global accounting standard for equity-based compensation. In the project, the FASB wishes to resolve whether compensation paid in the form of equity instruments should be recognized in the financial statements and how this compensation should be measured.

The FASB has tentatively determined that all equity-based compensation should be recognized in the financial statements beginning in 2005. Deliberations as to how equity-based compensation should be measured are ongoing.

The Company established deferred compensation plans (the “Plans”) whereby eligible executive officers and directors of the Banks and/or Company (the “Participants”) earn retirement benefits during their tenure as employees or directors of the Banks and/or Company, subject to certain provisions contained in the Plans. Benefits are provided over future periods of time subsequent to the Participants’ termination of employment from the Banks or at such time that the Participants are no longer directors of the Company as defined by the Plans. The Plan benefits are indexed to earnings generated by single premium Bank Owned Life Insurance. This insurance provides cash values, earnings and death benefits of varying amounts as defined in the insurance policies.

Intangible Assets

The changes in the carrying amount of core deposit intangibles and goodwill for the year ended December 31, 2002 and 2003 and the six months ended June 30, 2004 are as follows:


	Core Deposit Intangibles			Goodwill		Total
	(dollars in thousands)
Balance, May 10, 2002	$	2,369		$	6,578	$	8,947
Amortization		(260	)		—		(260	)

Balance, December 31, 2002		2,109			6,578		8,687
Amortization		(389	)		—		(389	)

Balance, December 31, 2003	$	1,720		$	6,578	$	8,298
Intangibles resulting from acquisition (1)		898			5,556		6,454
Amortization		(245	)		—		(245	)

Balance, June 30, 2004	$	2,373		$	12,134	$	14,507

(1)	Core deposit intangibles and goodwill resulting from the acquisition of Community State Bank.

Results of Operations

Earnings

For the three months ended June 30, 2004, the Company earned $260.6 thousand, or $0.06 per weighted average common share ($0.05 per common share on a fully diluted basis), compared with $510.9 thousand for the three months ended June 30, 2003, or $.15 per weighted average common share ($.14 per common share on a fully diluted basis).

For the six months ended June 30, 2004, the Company earned $606.5 thousand, or $.15 per weighted average common share ($.13 per common share on a fully diluted basis), compared with $1.2 million for the six months ended June 30, 2003, or $.35 per weighted average common share ($.33 per common share on a fully diluted basis). The acquisition of Community State Bank, the Baybrook branch opening, the opening of our San Antonio operations and the associated additional overhead and acquisition related costs were major contributors to the reduced earnings.

Net Interest Income

Net interest income represents the amount by which interest income on interest-earning assets, including investment securities and loans and leases, exceeds interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is the principal source of the Company’s earnings. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. The Company’s net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “rate change.”

Net interest income increased $677.6 thousand or 15.4% to $5.1 million for the three months ended June 30, 2004 compared with $4.4 million for the three months ended June 30, 2003. Net interest income increased $1.5 million or 17.2% to $10.0 million for the six months ended June 30 2004 compared with $8.5 million for the six months ended June 30, 2003. The increase is primarily attributable to the increase in earning assets related to the acquisition of Community State Bank, and lower interest rates paid on liabilities during this period, offset partially by an increase in interest expense as the result of interest on debentures being treated as interest expense rather than non-interest expense. In periods prior to July 1, 2003, interest paid on debentures was included as a component of non-interest expense. This change in presentation resulted in a $272.4 thousand and a $538.1 thousand increase in interest expense for the three and six month periods ended June 30, 2004.

Changes in interest income and interest expense can result from variances in both volume and rate. The Company has an asset and liability management strategy designed to provide a proper balance between rate sensitive assets and rate sensitive liabilities, to attempt to maximize interest margins and to provide adequate liquidity for anticipated needs.

For the three months ended June 30, 2004, the net interest margin was 4.32% compared to 4.59% for the three months ended June 30, 2003. For the six months ended June 30, 2004, the net interest margin was 4.16% compared to 4.50% for the six months ended June 30, 2003. The primary reason for the drop in the net interest margin during the periods was due to SFAS No. 150 which required that the Company change the method of reporting dividends paid on trust preferred securities issued by its subsidiary trusts by including them as interest expense. In prior periods, dividends paid on trust preferred securities were included as a component of non-interest expense. This change in presentation resulted in a $272.4 thousand and a $538.1 thousand increase in interest expense for the three and six month periods ended June 30, resulting in a lower net interest margin.

The following table presents for the periods indicated an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities and the net interest margin on average total interest-earnings assets for the same periods. No tax-equivalent adjustments were made and all average balances are yearly average balances. Non-accruing loans and leases have been included in the table as loans and leases carrying a zero yield.


	For the three months ended June 30,
	2004							2003
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/Rate		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Loans and leases	$	350,367		$	5,837	6.70	%	$	263,576		$	4,761	7.25	%
Taxable securities		98,079			867	3.56			101,078			923	3.66
Tax-exempt securities		12,623			127	4.05			13,142			140	4.27
Federal funds sold and other temporary investments		12,375			87	2.83			6,929			41	2.37

Total interest-earning assets		473,444			6,918	5.88	%		384,725			5,865	6.11	%

Less allowance for possible credit losses		(3,598	)						(2,888	)

Total interest-earning assets, net of allowance for possible credit losses		469,846							381,837
Non-interest-earning assets		76,775							53,396

Total assets	$	546,621						$	435,233

Liabilities and stockholders’ equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	34,514		$	49	0.57	%	$	31,939		$	46	0.58	%
Saving and money market accounts		114,432			237	0.83			98,850			229	0.93
Time deposits		159,263			1,065	2.69			123,199			942	3.07
Jr. subordinated debentures (1)		18,000			272	6.08			—			—	—
Federal funds purchased		—			—	—			—			—	—
Other borrowings		41,699			213	2.05			37,501			243	2.60

Total interest-bearing liabilities		367,908			1,836	2.01	%		291,489			1,460	2.01	%

Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		131,789							92,862
Other liabilities		8,531							7,778

Total liabilities		508,228							392,129

Company obligated mandatory redeemable trust preferred securities of subsidiary trust (1)		—							10,000
Stockholders’ equity		38,393							33,104

Total liabilities and stockholders’ equity	$	546,621						$	435,233

Net interest income				$	5,082						$	4,405

Net interest spread						3.87	%						4.10	%
Net interest margin⁽²⁾						4.32	%						4.59	%

(1)	See discussion on adoption of SFAS 150 on page 28 of this document.

(2)	The net interest margin is equal to net interest income divided by average interest-earning assets.


	For the six months ended June 30,
	2004							2003
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/Rate		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Loans and leases	$	356,643		$	11,363	6.41	%	$	262,293		$	9,477	7.29	%
Taxable securities		102,913			1,877	3.68			96,352			1,690	3.54
Tax-exempt securities		12,804			257	4.04			13,103			278	4.28
Federal funds sold and other temporary investments		11,546			131	2.28			10,871			131	2.43

Total interest-earning assets		483,906			13,628	5.66	%		382,619			11,576	6.10	%

Less allowance for possible credit losses		(3,680	)						(2,934	)

Total interest-earning assets, net of allowance for possible credit losses		480,226							379,685
Non-interest-earning assets		56,180							50,731

Total assets	$	536,406						$	430,416

Liabilities and stockholders’ equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	37,016		$	95	0.52	%	$	33,488		$	101	0.61	%
Saving and money market accounts		115,762			498	0.87			95,961			519	1.09
Time deposits		158,659			2,047	2.59			123,573			1,939	3.16
Jr. subordinated debentures (1)		18,000			538	6.01			—			—	—
Federal funds purchased		—			—	—			—			—	—
Other borrowings		43,224			439	2.04			36,160			475	3.16

Total interest-bearing liabilities		372,661			3,617	1.95	%		289,182			3,034	2.12	%

Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		120,230							93,747
Other liabilities		5,014							4,629

Total liabilities		497,905							387,558

Company obligated mandatory redeemable trust preferred securities of subsidiary trust (1)		—							10,000
Stockholders’ equity		38,501							32,858

Total liabilities and stockholders’ equity	$	536,406						$	430,416

Net interest income				$	10,011						$	8,542

Net interest spread						3.71	%						3.98	%
Net interest margin⁽²⁾						4.16	%						4.50	%

(1)	See discussion on adoption of SFAS 150 on page 28 of this document.

(2)	The net interest margin is equal to net interest income divided by average interest-earning assets.

The following table compares the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) related to higher outstanding balances and the volatility of interest rates. For purposes of these tables, changes attributable to both rate and volume, which cannot be segregated, have been allocated to rate.


	Three Months Ended June 30, 2004 Compared With 2003									Six Months Ended June 30, 2004 Compared With 2003
	Increase (Decrease) due to									Increase (Decrease) due to
	Amount			Rate			Total			Amount		Rate			Total
	(dollars in thousands)									(dollars in thousands)
Interest-earning assets:
Loans, including fees	$	1,449		$	(373	)	$	1,076		$	3,007	$	(1,121	)	$	1,886
Investment securities		(34	)		(35	)		(69	)		114		52			166
Federal funds sold and other investments		38			8			46			8		(8	)		—

Total increase (decrease) in interest income		1,453			(400	)		1,053			3,129		(1,077	)		2,052

Interest-bearing liabilities:
Deposits other than time		37			(26	)		11			94		(121	)		(27	)
Time, $100,000 and over		96			(119	)		(23	)		172		(296	)		(124	)
Time under $100,000		149			(4	)		145			286		(54	)		232
Jr. subordinated debentures		272			—			272			538		—			538
Federal funds purchased and other borrowings		22			(52	)		(30	)		164		(200	)		(36	)

Total increase (decrease) in interest expense		576			(201	)		375			1,254		(671	)		583

Increase (decrease) in net interest income	$	877		$	(199	)	$	678		$	1,875	$	(406	)	$	1,469

Provision for Possible Credit Losses

The provision for possible credit losses is established through charges to earnings in the form of a provision in order to bring the Company’s allowance for possible credit losses to a level deemed appropriate by management based on the factors discussed under “-Financial Condition - Allowance for Possible Credit Losses.” The Company performs an analysis of its allowance for possible credit losses on a quarterly basis.

For the three months ended June 30, 2004, the provision for possible credit losses decreased by $50.0 thousand to $400.0 thousand compared with $450.0 for the three months ended June 30, 2003. For the six months ended June 30, 2004, the provision for possible credit losses decreased by $50.0 thousand to $875.0.0 thousand compared with $925.0 for the six months ended June 30, 2003.

Non-Interest Income and Non-Interest Expense

The Company’s primary source of non-interest income is service charges on accounts. The remaining non-interest income sources include wire transfer fees, collection and cashier’s check fees, safe deposit box rentals, credit card income, rental income and credit life sales income. Also included in this category are net gains or losses realized on the sale of investment securities.

The major component of non-interest expense is employee compensation and benefits. The Company’s non-interest expenses also include day-to-day operating expenses, such as professional fees, advertising, supplies, occupancy expense, depreciation and amortization of building, leasehold improvements, furniture and equipment. The Bank has focused on building a de novo branch network through the employment of experienced lenders and staff in each of its designated market areas. The additional expenses related to the de novo branch expansion will reduce earnings until branch growth is sufficient to cover those expenses. The Company has also made selective bank acquisitions; cost associated with the acquisitions and integration of the acquired banks into the Company also increased non-interest expense.

The following table compares the various components of the change in non-interest income and non-interest expense information for the periods indicated:


	Three Months Ended June 30,
	2004		2003		Increase (Decrease)			Percent Change
	(dollars in thousands)
Non-interest income: Service charges	$	1,068	$	928	$	140		15.1	%
Gain on sale of investment securities		—		114		(114	)	(100.0	)%
Other operating income		175		333		(158	)	(47.4	)%

Total non-interest income	$	1,243	$	1,375	$	(132	)	(9.6	)%

Non-interest expense: Salaries and employee benefits	$	2,598	$	1,954	$	643		32.9	%
Occupancy expense and equipment.		1,016		645		371		57.5	%
Professional and outside service fees		651		619		33		5.3	%
Office expenses		432		240		192		80.0	%
Jr. subordinated debentures		—		192		(192	)	(100.0	)%
Other		937		1,034		97		(9.4	)%

Total non-interest expense	$	5,634	$	4,684	$	950		20.3	%


	Six Months Ended June 30,
	2004		2003		Increase (Decrease)			Percent Change
	(dollars in thousands)
Non-interest income: Service charges	$	2,089	$	1,765	$	324		18.4	%
Gain on sale of investment securities		66		247		(181	)	(73.3	)%
Other operating income		312		476		(164	)	(34.5	)%

Total non-interest income	$	2,467	$	2,488	$	(21	)	(0.8	)%

Non-interest expense:
Salaries and employee benefits	$	5,053	$	3,724	$	1,329		35.7	%
Occupancy expense and equipment.		1,995		1,231		764		62.1	%
Professional and outside service fees		1,270		1,012		258		25.5	%
Office expenses		770		506		264		52.2	%
Jr. subordinated debentures		—		383		(383	)	(100.0	)%
Other		1,834		1,765		69		3.9	%

Total non-interest expense	$	10,922	$	8,621	$	2,301		26.7	%

For the three months ended June 30, 2004, the Company earned $1.1 million in income from service charges, an increase of $140.0 thousand or 15.1% in income from service charges compared with income from service charges of $928.3 thousand for the three months ended June 30, 2003. Total non-interest income decreased this period by $132.0 thousand or 9.6% compared with the same period in 2003. The decrease in total non-interest income is related to the sale of The Express Banks charter to China Trust which resulted in a gain of $168 thousand in the second quarter of 2003.

For the six months ended June 30, 2004, the Company earned $2.1 million in income from service charges, an increase of $324.0 thousand or 18.4% in income from service charges compared with income from service charges of $1.8 million for the six months ended June 30, 2003. Total non-interest income decreased this period by $21.0 thousand or 0.08% compared with the same period in 2003. The decrease in total non-interest income is related to the sale of The Express Banks charter to China Trust which resulted in a gain of $168 thousand in the second quarter of 2003.

Non-interest expense for the three months ended June 30, 2004 increased $950.0 thousand or 20.3% to $5.6 million compared with non-interest expense of $4.7 million for the three months ended June 30, 2003. Non-interest expense for the six months ended June 30, 2004 increased $2.3 million or 26.7% to $10.9 million compared with non-interest expense of $8.6 million for the six months ended June 30, 2003. The increase during the period is mainly the result of additional salaries, benefits and occupancy expenses connected with the acquisition of Community State Bank in January 2004, the opening of the Baybrook branch in December 2003 and the opening of the San Antonio banking operations.

Income Taxes

Federal income tax is reported as income tax expense and is influenced by the amount of taxable income, the amount of tax-exempt income, the amount of nondeductible interest expense and the amount of other nondeductible expense. Income tax expense decreased $104.7 thousand or 77.4% to $30.5 thousand for the three months ended June 30, 2004 compared with $135.2 thousand for the three months ended June 30, 2003. Income tax expense decreased $247.7 thousand or 76.8% to $74.8 thousand for the six months ended June 30, 2004 compared with $322.5 thousand for the six months ended June 30, 2003. The decrease during both periods was partially due to a significant decrease in pre-tax income from $646.1 thousand in the three months ended June 2003 to $291.0 in the three months ended June 2004 and a decrease in pre-tax income from $1.5 million in the six months ended June 2003 to $681.2 thousand in the six months ended June 2004.

Financial Condition

Loan and Lease Portfolio

The loan and lease portfolio is the largest category of the Company’s earning assets. The Company is a community banking organization serving consumers, professionals and businesses with interests in and around the metropolitan areas of Houston and San Antonio. The Company’s primary strategy is to provide full service commercial banking with experienced loan officers and staff who focus on small to medium-sized businesses with loan requirements between $50.0 thousand and $3.5 million. This strategy includes building strong relationships while providing comprehensive banking services including working capital, fixed asset, real estate and personal loan needs, and lease financing. Additional loan services, such as long-term mortgages and factoring, are also provided through third party providers.

At June 30, 2004, loans and leases, net of unearned discount and fees, had increased $88.1 million or 30.7% to $375.5 million from $287.4 million at December 31, 2003. The increase was primarily due to the acquisition of Community State Bank and internal growth.

The following table shows the composition of the Company’s loan and lease portfolio as of June 30, 2004 and December 31, 2003:


	As of June 30, 2004					As of December 31, 2003
	Amount			Percent		Amount			Percent
	(dollars in thousands)
Commercial, financial and industrial	$	92,944		24.8	%	$	62.888		21.9	%
Construction/land development		28,605		7.6	%		20,688		7.2	%
Real estate:
1-4 Family first lien		21,985		5.9	%		16,491		5.7	%
1-4 Family jr. lien		5,332		1.4	%		6,269		2.2	%
Multi family residential		2,863		0.8	%		4,991		1.8	%
Non farm non-residential		189,345		50.4	%		139,849		48.6	%
Consumer		27,051		7.2	%		27,305		9.5	%
Lease financing		9,420		2.5	%		11,150		3.9	%

Gross loans and leases		377,545		100.5	%		289,631		100.8	%
Less: unearned discount and fees		(2,045	)	(0.5	)%		(2,192	)	(0.8	)%

Net loans and leases	$	375,500		100.0	%	$	287,439		100.0	%

The Company’s real estate loans are generally secured by first liens on real estate, typically have fixed interest rates and amortize over a 10 to 15 year period with balloon payments due at the end of one to seven years. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. The Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit checks, appraisals and a review of the financial condition of the borrower and guarantors.

The Company’s commercial loans are primarily made within its market area and are underwritten on the basis of the borrower’s ability to service the debt from income. As a general practice, the Company takes as collateral a lien on any available real estate, equipment or other assets owned by the borrower and obtains the personal guaranty of the borrower. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans is due to the type of collateral securing these loans. The increased risk also derives from the expectation that commercial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and servicing than other types of loans.

Non-performing Assets

The Company had $5.6 million and $3.2 million in non-performing assets for the periods ended June 30, 2004 and December 31, 2003, respectively. Management believes the risks in non-performing assets to be significant as there may be some portion of the principal which will become uncollectible.

The accrual of interest on loans or leases is discontinued when, in the opinion of management (based upon such criteria as default in payment, collateral deterioration, decline in cash flow, recurring operating loss, declining sales, bankruptcy and other financial conditions which could result in default), the borrower’s financial condition is such that the collection of interest is doubtful. The Company has a general policy of placing past due loans and leases on non-accrual status when such loans and leases are 90 days or more past due or when management believes that the collateral may be insufficient to cover both interest and principal of the loan or lease. As of June 30, 2004, 48 loans and leases in the aggregate amount of $3.0 million were on non-accrual status.

Placing a loan or lease on non-accrual status has a two-fold impact on net interest income. First, it may cause a charge against earnings for the interest, which had been accrued but not yet collected on the loan. Secondly, it eliminates future interest earnings with respect to that particular loan from the Company’s revenues. Interest on such loans or leases is not recognized until the entire principal amount is collected or until the loan or lease is returned to a performing status.

The Company may renegotiate the terms of a loan or lease because of deterioration in the financial condition of a borrower. This renegotiation enhances the probability of collection. There were no restructured loans or leases at June 30, 2004 or December 31, 2003.

Other real estate consists of property owned by the Company as a result of foreclosure on collateral or similar actions. It is recorded at fair value at the time of acquisition, less estimated selling costs. As of June 30, 2004 the Company’s other real estate totaled $2.6 million and consisted of eleven commercial properties. Four of such properties, totaling $971.4 thousand, were acquired through the acquisition of Community State Bank

The following table presents information regarding non-performing assets as of the dates indicated:


	June 30, 2004			December 31, 2003
	(dollars in thousands)
Nonaccrual loans and leases	$	2,971		$	2,199
Restructured loans and leases		—			—
Loans and leases which are contractually past due 90 or more days as to interest or principal payments but are not included above		13			87

Total nonperforming loans and leases		2,984			2,286
Other real estate		2,576			924

Total nonperforming assets	$	5,560		$	3,210

Ratios:
Nonperforming loans and leases to total loans and leases		0.8	%		0.8	%
Nonperforming assets to total loans and leases plus other real estate		1.5	%		1.1	%

Allowance for Possible Credit Losses

The allowance for possible credit losses is established through charges to earnings in the form of a provision for possible credit losses. Actual credit losses or recoveries of credit losses are charged or credited directly to the allowance.

The amount of the allowance for possible credit losses is determined by management after considering several factors, including the historical loss experience of the Company in relation to outstanding loans and leases, the existing level of the allowance for possible credit losses, reviews of loan or lease quality by management and bank regulatory authorities, peer group information and an evaluation of the economy of the Company’s lending area. In addition to specific allocations based on a review of individual credits, management makes a provision for possible credit losses on a monthly basis for unexpected or unforeseen possible credit losses. The Company performs an analysis of its allowance on a quarterly basis.

The Company charged off a net of $573.0 thousand (0.32% of average net loans and leases) and $1.8 million (0.67% of average loans and leases) in loans and leases during the six-month period ended June 30, 2004 and the year ended December 31, 2003, respectively.

As of June 30, 2004, the Company’s allowance for possible credit losses was $3.8 million or 1.1% of the average net loans and leases compared with $2.9 million or 1.1% of the average net loans and leases as of December 31, 2003. Although additional losses may occur, based on the detailed analysis and evaluation performed, management believes the allowance for possible credit losses to be adequate to absorb probable losses inherent in the loan and lease portfolio at June 30, 2004.

The following table presents, for the periods indicated, an analysis of the allowance for possible credit losses and other related data:


	As of and for the six months ended June 30, 2004			As of and for the year ended December 31, 2003
	(dollars in thousands)
Loans and leases⁽¹⁾:
Average net loans and leases outstanding during period	$	356,643		$	267,764

Net loans and leases outstanding at end of period	$	375,500		$	287,439

Transactions in Allowance for Possible Credit Losses:

Balance at beginning of period	$	2,930		$	3,017
Balance acquired in the Community State Bank acquisition		603			—
Charge-offs for period:
Commercial and industrial		(419	)		(854	)
Real estate		(54	)		(296	)
Leases		(28	)		(551	)
Consumer and other		(140	)		(205	)
Recoveries of loans and leases previously charged off:
Commercial and industrial		8			63
Real estate		6			22
Leases		27			18
Consumer and other		27			16

Net charge offs		(573	)		(1,787	)
Provision for possible credit losses		875			1,700

Allowance for possible credit losses at end of period	$	3,835		$	2,930

Ratios:
Net loan and lease charge-offs (annualized) to average net loans and leases		0.32	%		0.67	%
Net loan and lease charge-offs (annualized) to end of period net loans and leases		0.31	%		0.62	%
Allowance to average net loans and leases		1.08	%		1.09	%
Allowance to end of period net loans and leases		1.02	%		1.02	%
Net loan and lease charge-offs to allowance		14.94	%		60.99	%

(1)	All loan and lease amounts are net of unearned discount.

The following table describes the allocation of the allowance for possible credit losses among various categories of loans and leases and certain other information. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of the credit portfolio.


	As of June 30, 2004				As of December 31, 2003
	Amount		Percent of Loans to Net Loans and Leases		Amount		Percent of Loans to Net Loans and Leases
	(dollars in thousands)
Balance of allowance for possible credit losses applicable to:
Commercial, financial and industrial	$	624	24.8	%	$	448	21.9	%
Real estate		715	65.9	%		657	65.5	%
Consumer (net)		46	7.2	%		14	9.4	%
Lease financing (net)		252	2.1	%		281	3.2	%
Unallocated		2,198	—			1,530	—

Total allowance for possible credit losses	$	3,835			$	2,930

Deposits

The Company relies primarily on its deposit base to fund its lending activities. The Company follows a policy of paying interest rates on interest-bearing accounts which are competitive with other commercial banks in its market area. It sells federal funds on an overnight basis and from time to time makes other investments with various maturities. The Company follows a policy of not soliciting or accepting brokered deposits.

The following table presents an analysis of deposits by type at the indicated dates:


	June 30, 2004		December 31, 2003
	Amount		Amount
	(dollars in thousands)
Noninterest-bearing deposits	$	130,666	$	94,707
Interest-bearing deposits		153,852		142,628
CDs in amounts of less than 100M		71,842		56,892
CDs in amounts of $100M or more		89,177		73,069

Total deposits	$	445,537	$	367,296

The Company’s total deposits increased from $367.3 million as of December 31, 2003 to $445.5 million as of June 30, 2004, which represented an increase of $78.2 million or 21.3%. Non-interest-bearing deposits constituted 29.3% of total deposits at June 30, 2004 compared to 25.8% at December 31, 2003. This increase is primarily due to the acquisition of Community State Bank in January 2004 as well as internal growth.

The amount of deposits in certificates of deposit (“CDs”) including IRAs and public funds in amounts of $100.0 thousand or more was 20.0% of deposits as of June 30, 2004 compared to 19.9% as of December 31, 2003.

Interest expense on CDs in amounts of $100.0 thousand or more was $1.1 million and $1.2 million for the six months ended June 30, 2004 and 2003, respectively. This decrease in interest expense is primarily the result of low interest rates in 2004. Interest expense on CDs in amounts of $100.0 thousand or more was $2.5 million for the year ended December 31, 2003. The higher cost of such funds relative to other deposits can have a negative impact on the Company’s net interest margin.

The following table sets forth the amount of the Company’s certificates of deposit that are $100.0 thousand or greater by the time remaining until maturity as of June 30, 2004:


	As of June 30, 2004
	(dollars in thousands)
Remaining maturity
Three months or less	$	12,321
Over three months through six months		16,401
Over six months through one year		27,430
Over one year		33,025

Total	$	89,177

Borrowings

During the second quarter of 2004, borrowings consisted of Federal Home Loan Bank advances. At June 30, 2004, FHLB borrowings were $51.6 million compared to $43.8 million at December 31, 2003. At June 30, 2004 and June 30, 2003, the Company had no federal funds purchased. The FHLB borrowings were primarily used to purchase additional mortgage-backed and collateralized mortgage obligations (CMOs) which increased the spread over the interest cost of those funds. As of June 30, 2004, the Company had $18.0 million of junior subordinated debentures outstanding issued to its subsidiary trusts.

Off-Balance Sheet Risk

The Company is party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of condition. The contract or notional amounts of those instruments reflect the extent of the involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

At June 30, 2004 and December 31, 2003, the Company had outstanding unfunded standby letters of credit, which are primarily cash secured, totaling $701.0 thousand and $764.1 thousand, respectively, and unfunded loan commitments of $78.0 million and $43.9 million, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company considers approximately 35.0% to be firm and will be exercised. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.

Investment Portfolio

The Company uses its securities portfolio to ensure liquidity for cash requirements, to manage interest rate risk, to provide a source of income, to ensure collateral is available for municipal pledging requirements and to manage asset quality. Securities available for sale totaled $105.0 million at June 30, 2004, a decrease of $11.1 million or 9.6% from $116.1 million at December 31, 2003. The average life of the securities portfolio at June 30, 2004 was 4.6 years compared to 4.1 years at December 31, 2003.

Capital Resources

Total stockholders’ equity was $37.2 million at June 30, 2004 compared with $38.5 million at December 31, 2003, a decrease of $1.3 million or 3.4%. The decrease was primarily due to the change in the value of the securities portfolio.

Capital management consists of providing equity to support both current and future operations. The Company is subject to capital adequacy requirements imposed by the Federal Reserve and the Banks are subject to capital adequacy requirements imposed by the Office of the Comptroller of Currency (“OCC”). Both the Federal Reserve and the OCC have adopted risk-based capital requirements for assessing bank holding company and national bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The risk-based capital standards issued by the Federal Reserve require the Company to have “Tier 1 capital” of at least 4.0% and “total risk-based capital” (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted assets. “Tier 1 capital” generally includes common shareholders’ equity and qualifying perpetual preferred stock together with related surpluses and retained earnings, less deductions for goodwill and various other intangibles. “Tier 2 capital” may consist of a limited amount of intermediate-term preferred stock, a limited amount of term subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier 1 capital and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.”

The Federal Reserve has also adopted guidelines which supplement the risk-based capital guidelines with a minimum ratio of Tier 1 capital to average total consolidated assets (leverage ratio) of 3.0% for institutions with well diversified risk, including no undue interest rate exposure; excellent asset quality; high liquidity; good earnings; and that are generally considered to be strong banking organizations, rated composite 1 under applicable federal guidelines, and that are not experiencing or anticipating significant growth. Other banking organizations are required to maintain a leverage ratio of at least 4.0%. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets.

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, each federal banking agency revised its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily mortgages. The Banks are subject to capital adequacy guidelines of the OCC that are substantially similar to the Federal Reserve’s guidelines. Also pursuant to FDICIA, the OCC has promulgated regulations setting the levels at which an insured institution such as the banks would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The Banks are classified “well capitalized” for purposes of the OCC’s prompt corrective action regulations.

The following table provides a comparison of the Company’s and the Banks’ leverage and risk-weighted capital ratios as of June 30, 2004 to the minimum and well-capitalized regulatory standards:


	Minimum Required for Capital Adequacy Purposes		To be Well Capitalized under Prompt Corrective Action Provisions		Actual Ratio at June 30, 2004
The Company
Leverage ratio	4.00	%⁽¹⁾	N/A		7.29	%
Tier 1 risk-based capital ratio	4.00		N/A		9.08
Total risk-based capital ratio	8.00		N/A		11.13

First Community Bank, N.A.
Leverage ratio	4.00	%⁽²⁾	5.00	%	7.22	%
Tier 1 risk-based capital ratio	4.00		6.00		9.33
Total risk-based capital ratio	8.00		10.00		10.23

First Community Bank San Antonio, N. A.
Leverage ratio	4.00	%⁽²⁾	5.00	%	36.34	%
Tier 1 risk-based capital ratio	4.00		6.00		42.31
Total risk-based capital ratio	8.00		10.00		43.57

(1)	The Federal Reserve may require the Company to maintain a leverage ratio above the required minimum.

(2)	The OCC may require the Banks to maintain a leverage ratio above the required minimum.

New Accounting Standards

FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. FIN 46 establishes accounting guidance for consolidation of variable interest entities (“VIE”) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE is the entity that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIE’s were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003, and are otherwise effective at the beginning of the first interim period beginning after June 15, 2003. First Community Capital Trust I and II were formed in 2001 for the purpose of issuing $10 million of trust preferred securities and First Community Capital Trust III was formed in December 2003 for the purpose of issuing $8 million of trust preferred securities. Trust I, II and III are currently subject to the requirements of FIN 46. In December 2003, the FASB issued Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”). FIN 46R provides guidance on how to identify a variable interest entity and determine when the assets, liabilities, noncontrolling interests and results of operations of a variable interest entity need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will consolidate the entity if the company’s interest in the variable interest entity is such that the company will absorb a majority of the variable interest entity’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. As of June 30, 2004, the Company had no investments in variable interest entities requiring consolidation FIN 46R will requires that the Trusts that issued the Company’s outstanding company-obligated mandatorily redeemable trust preferred securities be deconsolidated from the consolidated financial statements. The Company adopted FIN 46R effective January 1, 2004. As a result, the trust preferred securities are no longer shown in the consolidated financial statements. Instead, the junior subordinated debentures issued by the Company to these trusts are shown as liabilities in the consolidated balance sheets and interest expense associated with the junior subordinated debentures is shown in the consolidated statements of income.

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies, measures and discloses in its financial statements certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify financial instruments that are within its scope as a liability, in most circumstances. Such financial

instruments include (i) financial instruments that are issued in the form of shares that are mandatorily redeemable; (ii) financial instruments that embody an obligation to repurchase the issuer’s equity shares, or are indexed to such an obligation, and that require the issuer to settle the obligation by transferring assets; (iii) financial instruments that embody an obligation that the issuer may settle by issuing a variable number of its equity shares, if, at inception, the monetary value of the obligation is predominately based on a fixed amount, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares; and (iv) certain freestanding financial instruments. SFAS 150 is effective for contracts entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management. The Company’s primary earnings source is net interest income; therefore, the Company devotes significant time and has invested in resources to assist in the management of market risk, liquidity risk, capital and asset quality. The Company’s net interest income is affected by changes in market interest rates and by the level and composition of interest-earning assets and interest-bearing liabilities. The Company’s objectives in its asset/liability management are to utilize its capital effectively, to provide adequate liquidity and to enhance net interest income, without taking undue risks or subjecting the Company unduly to interest rate fluctuations. The Company takes a coordinated approach to the management of market risk, liquidity and capital. This risk management process is governed by policies and limits established by senior management which are reviewed and approved by the Asset/Liability Committee (“ALCO”). The ALCO, which is comprised of members of senior management and the Board, meets to review, among other things, economic conditions, interest rates, yield curve, cash flow projections, expected customer actions, liquidity levels, capital ratios and repricing characteristics of assets, liabilities and off-balance sheet financial instruments.

Interest Rate Sensitivity Management. Interest rate sensitivity refers to the relationship between market interest rates and net interest income resulting from the repricing of certain assets and liabilities. Interest rate risk arises when an earning asset matures or when its rate of interest changes in a time frame different from that of the supporting interest-bearing liability. One way to reduce the risk of significant adverse effects on net interest income of market rate fluctuations is to minimize the difference between rate sensitive assets and liabilities, referred to as gap, by maintaining an interest rate sensitivity position within a particular time frame.

Maintaining an equilibrium between rate sensitive assets and liabilities will reduce some of the risk associated with adverse changes in market rates, but it will not guarantee a stable net interest spread because yields and rates may not change simultaneously and may change by different amounts. These changes in market spreads could materially affect the overall net interest spread even if assets and liabilities were perfectly matched. If more assets than liabilities reprice within a given period, an asset sensitive position or “positive gap” is created (rate sensitivity ratio is greater than 100%), which means asset rates respond more quickly when interest rates change. During a positive gap, a decline in market rates will have a negative impact on net interest income. Alternatively, where more liabilities than assets reprice in a given period, a liability sensitive position or “negative gap” is created (rate sensitivity ratio is less than 100%) and a decline in interest rates will have a positive impact on net interest income.

Liquidity. The Company’s asset and liability management policy is intended to maintain adequate liquidity and thereby enhance its ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain operations. The Company accomplishes this through management of the maturities of its interest-earning assets and interest-bearing liabilities. To the extent practicable, the Company attempts to match the maturities of its rate sensitive assets and liabilities. Liquidity is monitored daily and overall interest rate risk is assessed through reports showing both sensitivity ratios and existing dollar “gap” data. The Company believes its present position to be adequate to meet its current and future liquidity needs.

The liquidity of the Company is maintained in the form of readily marketable investment securities, demand deposits with commercial banks, the Federal Reserve Bank of Dallas, the Federal Home Loan Bank of Dallas, vault cash and federal funds sold. While the minimum liquidity requirement for banks is determined by federal bank regulatory agencies as a percentage of deposit liabilities, the Company’s management monitors liquidity requirements as warranted by interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan and lease portfolios and deposits. In addition to the liquidity provided by

the foregoing, the Company has correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. The Company has established a $4.0 million overnight line of credit with TIB – The Independent Bankers Bank, Dallas, Texas, a $3.0 million overnight line of credit with Southwest Bank of Texas, Houston, Texas and a $15 million overnight line of credit for the purchase of Fed Funds with Bank One, N.A. The Company’s securities safekeeping is handled by the Federal Home Loan Bank of Dallas, which allows the Company the capability of borrowing up to the amount of available collateral.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. As of the end of the period covered by this report the Company carried out an evaluation, under the supervision and with the participation of our management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Company’s management within the time periods specified in the SEC’s rules and forms.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

a. Not applicable

b. Not applicable

c. Not applicable

d. Not applicable

e. Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company’s annual meeting of shareholders was held on May 27, 2004. At the meeting, the shareholders of the Company considered and acted upon the proposals listed below:

The current board of directors of the Company consisting of Messrs. George A. Clark, Jr., Linn C. Eignus, Robert A. Ferstl, Louis F. Goza, Nigel J. Harrison, Thomas R. Johnson, Kenneth A. Love, George I. Pinder, Richard L. Wagoner and Charles L. Whynot were elected to serve as directors of the Company until the Company’s 2005 annual meeting of shareholders and until their successors are duly elected and qualified. A total 2,138,439 shares were voted in favor of the election of each director, 1,000 shares were voted against any director and no shares abstained from voting.

The shareholders approved a proposal to amend the Company’s 1996 Stock Option Plan to increase the number of shares of common stock issuable thereunder from 570,000 shares to 720,000 shares. A total of 2,077,875 shares were voted in favor of the proposal, 24,196 shares were voted against the proposal and 20,163 shares abstained from voting on the proposal.

The shareholders ratified the appointment of Harper & Pearson Company, P.C. as the independent auditors of the books and accounts of the Company for the year ending December 31, 2004. A total of 2,130,663 shares were voted in favor of the proposal, no shares were voted against the proposal and 1,000 shares abstained from voting on the proposal.

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits:

The following exhibits are filed with this Quarterly Report on Form 10-QSB:


Exhibit Number		Description of Exhibit
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

b. Reports on Form 8-K

The Company did not file any Current Report on Form 8-K during the second quarter of 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		FIRST COMMUNITY CAPITAL CORPORATION
		(Registrant)

Date: August 16, 2004		/S/ NIGEL J. HARRISON
		Nigel J. Harrison
		President and Chief Executive Officer

Date: August 16, 2004		/S/ JAMES M. MCELRAY
		James M. McElray
		Executive Vice President and Chief Financial Officer

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