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EX-23 - CONSENT OF HACKER, JOHNSON, & SMITH, P.A. - FIRST COMMUNITY BANK CORP OF AMERICAdex23.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - FIRST COMMUNITY BANK CORP OF AMERICAdex21.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS - FIRST COMMUNITY BANK CORP OF AMERICAdex321.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - FIRST COMMUNITY BANK CORP OF AMERICAdex322.htm
EX-99.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REQUIRED BY SECTION 111(B)(4) OF TH - FIRST COMMUNITY BANK CORP OF AMERICAdex992.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER REQUIRED BY RULE 13A-14(A)/15-14(A - FIRST COMMUNITY BANK CORP OF AMERICAdex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER REQUIRED BY RULE 13A-14(A)/15-14(A) - FIRST COMMUNITY BANK CORP OF AMERICAdex311.htm
EX-99.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REQUIRED BY SECTION 111(B)(4) OF TH - FIRST COMMUNITY BANK CORP OF AMERICAdex991.htm
Table of Contents
Index to Financial Statements

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

Annual Report Pursuant to Section 13 or 15(d)

Of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2010

Commission File Number: 000-50357

 

 

FIRST COMMUNITY BANK CORPORATION OF AMERICA

 

 

 

Florida   65-0623023
(State of Incorporation)   (IRS Employer Identification No.)

9001 Belcher Road

Pinellas Park, Florida 33782

(727) 520-0987

(Address and Telephone Number)

 

 

Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class:

 

Name of each exchange on which registered:

Common Stock, $0.05 par value   Nasdaq Stock Market

Securities Registered Pursuant to Section 12(g) of the Securities Exchange

Act of 1934: Common Stock, $0.05 par value

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    Yes  ¨    No   x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not 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-K    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the shares of voting common stock held by non-affiliates of the registrant computed by reference to the closing sales price of such shares on the NASDAQ Capital Market on June 30, 2010, the last business day of the Registrant’s most recently completed second fiscal quarter, was $6,709,531.

On March 15, 2011, there were 5,459,173 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

     Page  
PART I.   
   Item 1.   Business      3   
   Item 1A.   Risk Factors      16   
   Item 1B.   Unresolved Staff Comments      25   
   Item 2.   Properties      25   
   Item 3.   Legal Proceedings      26   
   Item 4.   Reserved   
PART II.   
   Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      26   
   Item 6.   Selected Financial Data      27   
   Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operation      28   
   Item 7A.   Quantitative and Qualitative Disclosures About Market Risk      42   
   Item 8.   Financial Statements and Supplementary Data      42   
   Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      42   
   Item 9A(T).   Controls and Procedures      42   
   Item 9B.   Other Information      43   
PART III.   
   Item 10.   Directors, Executive Officers and Corporate Governance      43   
   Item 11.   Executive Compensation      48   
   Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      52   
   Item 13.   Certain Relationships and Related Transactions, and Director Independence      53   
   Item 14.   Principal Accountant Fees and Services      54   
PART IV.   
   Item 15.   Exhibits and Financial Statement Schedules      54   

 

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Index to Financial Statements

Forward Looking Statements

This report, including information incorporated herein by reference, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “is confident that” and similar expressions are intended to identify these forward-looking statements. These forward-looking statements involve risk and uncertainty and a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. We do not have a policy of updating or revising forward-looking statements except as otherwise required by law, and silence by management over time should not be construed to mean that actual events are occurring as estimated in such forward-looking statements.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our operations and subsidiaries include, but are not limited to, changes in:

 

   

the effects of future economic, business and market conditions and changes, domestic and foreign, including seasonality;

 

   

governmental monetary and fiscal policies;

 

   

legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, and changes in the scope and cost of Federal Deposit Insurance Corporation, or FDIC, insurance and other coverages;

 

   

changes in regulatory requirements specifically applicable to us, including regulatory approval as currently needed to pay dividends on our capital stock, including Series B Preferred Stock, as well as enforcement actions and the effects of new Office of Thrift Supervision or FDIC policy statements;

 

   

changes in accounting policies, rules and practices;

 

   

the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and other interest sensitive assets and liabilities;

 

   

the failure of assumptions and estimates underlying the establishment of reserves for possible loan losses and other estimates;

 

   

changes in borrowers’ credit risks and payment behaviors;

 

   

changes in the availability and cost of credit and capital in the financial markets;

 

   

changes in the prices, values and sales volumes of residential and commercial real estate;

 

   

the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

 

   

the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

 

   

changes in technology or products that may be more difficult, costly, or less effective than anticipated;

 

   

the effects of war or other conflicts, acts of terrorism or other catastrophic events, including hurricanes, storms and flooding, that may affect general economic conditions;

 

   

the failure of assumptions and estimates and differences in and changes to economic, market and credit concentrations, including borrowers’ credit risks and payment behaviors from those used in our reviews of our loan portfolio and our loan portfolio stress test;

 

   

the risk that our deferred tax assets could be reduced if estimates of future taxable income from our operations and tax planning strategies are less than currently estimated, and sales of our capital stock in future offerings and/or other transfers of our capital stock could trigger a reduction in the amount of net operating loss carryforwards that we may be able to utilize for income tax purposes; and

 

   

other factors and risks described under “Risk Factors” herein.

All written and oral forward-looking statements that are made by or are attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

 

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Index to Financial Statements

PART 1

 

Item 1. Business.

General

First Community Bank Corporation of America is a Florida-based unitary savings and loan holding company with one wholly-owned bank subsidiary, First Community Bank of America (“First Community Bank”), a federal savings association under the supervision of the Office of Thrift Supervision (the “OTS”), and one nonbank subsidiary, First Community Lender Services, Inc. (“First Community Lender”).

First Community Bank Corporation of America is referred to herein as “First Community.” Unless otherwise specified, the words “we,” “our” and the “Company” refers collectively to First Community and its wholly-owned subsidiaries First Community Bank of America and First Community Lender Services, Inc.

First Community owns all of the outstanding common stock of First Community Bank and First Community Lender. Our primary business activity is the operation of First Community Bank, which was established in February 1985. First Community Bank has eleven Florida branch locations in Pinellas, Hillsborough, Pasco, and Charlotte Counties. It is a federally-chartered stock savings bank that provides a variety of banking services to small and middle market businesses and individuals through its four banking offices located in Pinellas County, two banking offices located in Hillsborough County, two banking offices located in Pasco County, and three banking offices located in Charlotte County.

First Community Bank is also a premier provider of association lockbox services, which supports the payment processing needs of property management companies along the West Coast of Florida. First Community Bank’s automated, state-of-the-art, association lockbox system offers its clients relief from the previously labor-intensive collection of maintenance payments, and allows associations to have those fees immediately deposited into their bank accounts. First Community Bank is a major player in this market segment, and is characterized by hands-on account management and what we believe to be one of the best customer service programs in the industry. We have realized continued growth with this service, which has generated low-cost, stable, core deposits, since its inception in 2003.

As of December 31, 2010, First Community Bank had assets of approximately $471 million, net loans of $333 million and deposits of $375 million. Due to its strong focus on commercial lending, approximately 52% of First Community Bank’s total loans are commercial.

First Community Lender was incorporated in 2001 as a wholly-owned subsidiary of First Community. First Community Lender was originally established to network with title insurance vendors. In November 2004, 1031 Exchange services were added. A 1031 Exchange allows customers to sell investment property/properties and defer any capital gains taxes by purchasing a “like-kind” replacement property/properties within a certain time frame under Section 1031 of the Internal Revenue Code of 1986, as amended, or the Code. First Community Lender had only nominal operations in 2010 and through the first three months of 2011.

The offices of First Community are located at 9001 Belcher Road, Pinellas Park, 33782, and our phone number is (727) 520-0987.

Recent Events

Acquisition Agreement with CBM Florida Holding Company and Community Bank & Company

As previously announced, on February 10, 2011, First Community and First Community Bank entered into an Acquisition Agreement (referred to in this Form 10-K as the “Acquisition Agreement”) with CBM Florida Holding Company (“CBM Holdings”) and Community Bank & Company (formerly, Community Bank of Manatee), under which First Community Bank will be merged with and into Community Bank & Company, and First Community will transfer to CBM Holdings all of the shares of First Community Lender (these two transactions are referred to in this Form 10-K as the “Disposition”). Under the terms of the Acquisition Agreement, First Community will receive $10 million in cash at the closing of the Disposition.

Our Board of Directors, in connection with entering into the Acquisition Agreement, approved a Plan Of Complete Liquidation And Dissolution for First Community (the “Plan”). The Plan must be approved by the holders of a majority of the outstanding shares of common stock of First Community at the special shareholders meeting called for April 11, 2011. If the Plan is approved by the shareholders, following the consummation of the Disposition, First Community will be required to wind up of all of its business and distribute thereafter to its common stockholders all of its remaining cash. It is presently anticipated that, if the Plan is approved by the shareholders and the Disposition is consummated in May or June 2011, such distributions will take place towards the end of 2011.

The completion of the transactions contemplated by the Acquisition Agreement is subject to certain conditions in addition to shareholder approval, including, among others, (i) the receipt of all regulatory approvals; (ii) the absence of any material adverse change in the business of First Community Bank; (iii) the accuracy of the representations and warranties made by each of the parties, and (iv) the compliance by each of the parties with their respective obligations under the Acquisition Agreement.

 

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Agreement with the U.S. Department of the Treasury Regarding Repurchase of TARP Stock

First Community currently has outstanding 10,685 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Stock”) that were issued to the U.S. Department of the Treasury under the TARP program on December 23, 2008. The liquidation value of the Series A Stock, including accrued but unpaid dividends, is approximately $11.15 million. While First Community was negotiating the Acquisition Agreement, it began negotiating with the Treasury to repurchase the Series A Stock at a discount. As previously announced, on March 11, 2011, First Community entered into a definitive Securities Purchase Agreement with the U.S. Department of the Treasury relating to the repurchase by First Community of the Series A Stock, as well as a Warrant to purchase 228,312 shares of First Community common stock (the “Warrant”), which was issued by First Community to the Treasury in connection with the issuance of the Series A Stock.

Subject to, and on the terms and conditions of, the Treasury agreement, effective at the closing of the Disposition, First Community will purchase from the Treasury all of the Series A Stock and the Warrant. The aggregate purchase price for the Series A Stock and the Warrant will be an amount in cash equal to (i) $7,200,000.00 (or 72% of the proceeds to be received from Community Bank & Company upon the closing of the Disposition) plus (ii) seventy-two percent (72%) of all cash assets of First Community at the closing of the Disposition after giving effect to (x) the payment by First Community of any expenses relating to the Disposition (the “Disposition Expenses”), (y) the payment of its debts and liabilities (the “Debt and Liabilities Payment”) and (z) a future distribution to (1) holders of First Community common stock outstanding as of the date of the Agreement plus (2) holders of the 3,132,970 shares of common stock to be issued upon the conversion of First Community’s 10% Cumulative Convertible Perpetual Preferred Stock, Series B, of up to Thirty-Five Cents ($0.35) per share of common stock (the “Distribution”), provided that the sum of the Disposition Expenses, the Debt and Liabilities Payment and the Distribution shall not exceed Three Million Five Hundred Twenty Seven Thousand Two Hundred Fifty Dollars ($3,527,250.00) in the aggregate.

Cease and Desist Orders of the OTS

As previously announced, on February 24, 2011, First Community and First Community Bank each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the Office of Thrift Supervision (“OTS”), and the OTS issued Orders to Cease and Desist to each of First Community and First Community Bank.

Under the terms of the OTS Orders, First Community Bank and First Community are required to, among other things:

within sixty (60) days, submit a written plan for First Community Bank to achieve by June 30, 2011, and thereafter maintain, a Tier 1 Capital Ratio equal to or greater than eight percent (8%) and a Total Risk-Based Capital Ratio equal to or greater than thirteen percent (13%) (the “Bank Capital Plan”);

within sixty (60) days, submit for review and non-objection a written plan for First Community to achieve by June 30, 2011, and thereafter maintain, the capital requirements imposed by the OTS on First Community Bank;

within sixty (60) days, submit for review and non-objection a written business plan for First Community Bank for 2011 and 2012 that addresses all corrective actions in the 2010 OTS examination relating to First Community Bank’s business operations, including First Community Bank’s plans to improve its core earnings and achieve profitability on a consistent basis throughout the term of the Business Plan (the “Bank Business Plan”);

within sixty (60) days, submit for review and non-objection a written business plan for First Community for 2011 and 2012 that addresses, among other things, the capital needs and requirements of First Community Bank, the capital necessary to support operations and debt service at First Community, and plans to improve First Community’s core earnings, reduce expenses, and achieve profitability on a consistent basis throughout the term of the Business Plan;

within sixty (60) days, revise First Community Bank’s policies, procedures and methodology relating to the timely establishment and maintenance of an adequate allowance for loan and lease losses (ALLL) level (ALLL Policy) to address all corrective actions set forth in the 2010 OTS Examination relating to ALLL;

within sixty (60) days, submit an updated comprehensive written plan with specific strategies, targets and timeframes to reduce First Community Bank’s level of problem assets;

 

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within sixty (60) days, develop, implement and adhere to a formal written Risk Management Function and Plan for First Community Bank that addresses all corrective actions discussed in the 2010 OTS Examination related to risk management at First Community Bank;

within sixty (60) days, develop, implement and adhere to a formal written Enterprise Risk Management Function and Plan for First Community that addresses all corrective actions discussed in the 2010 OTS Examination related to enterprise risk management;

within sixty (60) days, revise First Community Bank’s liquidity and funds management policies and procedures to address all corrective actions set forth in the 2010 OTS Examination relating to liquidity and funds management;

prepare and provide to the OTS various reports, including progress reports; and

ensure First Community Bank’s compliance with applicable laws, rules, regulations and agency guidelines, including the terms of the Orders.

Under the terms of the OTS Orders, First Community Bank and First Community may not:

increase First Community Bank’s total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the prior quarter without the prior written notice of non-objection by the OTS;

incur, issue, renew, or rollover any debt, increase any current lines of credit, or otherwise incur any additional debt without receiving the prior written non-objection of the OTS;

originate or purchase any new nonresidential real estate loans until the OTS approves First Community Bank Capital Plan notifies First Community Bank that it does not object to First Community Bank Business Plan;

appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without prior notice to the OTS;

enter into, renew, extend or revise any compensation or benefit agreements for directors or senior executive officers without prior notice to the OTS;

pay dividends or make any capital distributions without the prior approval of the OTS;

make any golden parachute payments or prohibited indemnification payments unless they comply with applicable regulations; or

make any incentive compensation payments to any senior executive officers who are directors of First Community Bank without prior approval of the OTS.

The OTS orders will remain in effect until modified or terminated by the OTS.

All customer deposits remain fully insured to the fullest extent permitted by the FDIC. The Bank expects to continue to serve its customers in all areas including making loans (other than nonresidential real estate loans), establishing lines of credit, accepting deposits and processing banking transactions. Neither First Community nor First Community Bank admitted any wrongdoing in entering into the respective Stipulation and Consent to the Issuance of a Cease and Desist Order. The OTS did not impose or recommend any monetary penalties.

Operating Strategy

We believe that building relationships is a crucial factor in differentiating us from the national and regional financial institutions. Even though the national and regional financial institutions typically offer more products and have more locations, they may lack the personal service that we offer. The most frequent customer complaints we hear about national and regional institutions are the lack of personalized service and the turnover in personnel, which limit customers’ abilities to develop relationships with their bankers. Many of our customers have advised us that they were willing to make a change in order to receive personalized service, and we believe a significant opportunity exists to attract and retain additional customers who are dissatisfied with their current banking relationship.

 

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We believe we are unique in the sense that we offer a Regional President and local Regional Board of Directors in each of the counties we serve, but all under the same bank charter. Each Region is operated like a community bank, emphasizing local leadership and local decision-making, with Regional Presidents making most major decisions. Our Regional Presidents have loan approval authority and deposit and loan pricing authority. This enables them to provide quicker service and to respond appropriately to their respective markets. Each county’s Regional Board and Regional President are drawn mainly from members of the local business community. We place emphasis on relationship banking so that each customer can identify and establish a comfort level with our bank officers and staff. While a significant portion of our lending effort is concentrated on commercial and professional businesses, we also focus on cross-marketing our deposit products to these borrowers. Many of our retail customers are the principals and employees of our small-and medium-sized business customers.

Our strategy through 2008 was to increase the size of our franchise through rapid growth and by aggressively pursuing business development opportunities. As discussed above, we are currently subject to OTS Orders which do not allow First Community Bank to increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the prior quarter without the prior written notice of non-objection by the OTS.

In the current economic and regulatory environment, First Community Bank’s management is employing several strategies that are designed to reduce the Bank’s assets and liabilities. First Community Bank is letting existing brokered deposits roll-off at maturity and has significantly reduced pricing on higher cost deposits. First Community Bank has for some time employed a strategy that increases low cost relationship driven core deposits, which is significantly improving deposit mix and will help the earnings potential going forward. On the asset side, the Bank is exploring a number of strategies to reduce classified assets through loan sales and aggressively marketing ORE properties. This strategy and other strategies are being employed to improve the over-all risk weighting of the loan and security portfolios.

Market Focus

Our marketing efforts are focused on attracting small and medium-sized businesses and individuals, including service companies, light manufacturing companies, commercial real estate developers, entrepreneurs and professionals, such as engineers, physicians, attorneys, certified public accountants, and architects.

We have been successful in penetrating this market through our ability to deliver:

 

   

tailored and flexible loan products;

 

   

comprehensive online banking and cash management services; and

 

   

competitive investment SWEEP products.

We distinguish ourselves from our competitors by providing a high level of personal service to customers who want quick, local decision making, and who appreciate and are looking for a long-term banking relationship. We believe banking is a business that requires public trust. Our senior management team has over 100 years of combined experience endeavoring to build a reputation worthy of our customers’ trust.

Products and Services

General. Through First Community Bank we offer a broad array of traditional banking products and services to our customers, including the products and services described below. These services are offered at each of our banking locations, as well as through our online banking program at www.fcbfl.com.

Deposits. We offer a full range of interest bearing and non-interest bearing accounts, including commercial and retail checking accounts, money market accounts, sweep accounts, cash management accounts, individual retirement accounts, savings accounts, and other time deposits, ranging from daily money market accounts to longer term certificates of deposit. We have tailored the rates and terms of our accounts and time deposits to compete with the rates and terms in our principal markets. We seek deposits from residents, businesses, professionals and employees of businesses in our primary markets. The FDIC insures all of our accounts up to the maximum amount permitted by law. In addition, we receive service charges that are competitive with other financial institutions in our principal markets, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and other similar fees.

Loan Activities. We rely on deposits, borrowings and other sources of funds to originate loans. We offer a full range of short- and medium-term commercial, consumer and real estate loans. We generally seek diversification within the loan portfolio by allocating total dollar amounts of loans to not exceed the percentage of the total loan portfolio as follows: 50% to real estate loans; 35% to consumer loans; and 20% to commercial and industrial loans. Our loan approval process provides for various levels of officer lending authority. When a loan amount exceeds officer lending authority levels, it is reviewed by the loan committee of our Board of Directors, which has ultimate lending authority. The loan committee meets as needed.

 

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The risk of non-payment of loans is inherent in all loans. However, we carefully evaluate all loan applicants and attempt to minimize our credit risk by using thorough loan application and approval procedures that we have established for each category of loan. In determining whether to make a loan, we consider the borrower’s credit history, analyze the borrower’s income and ability to repay the loan, and evaluate the need for collateral to secure recovery in the event of default. We have established an allowance for loan losses based upon assumptions and judgments regarding the ultimate collectability of loans in our portfolio and a percentage of the outstanding balances of specific loans when their ultimate collectability is considered questionable.

Our loan activities are primarily directed to individuals, businesses and professionals in our principal markets whose demand for funds generally fall within our bank’s respective legal lending limits and who are also likely deposit customers. We have the ability to make loans in excess of our individual loan limits when we are able to secure a commitment from another lending institution to purchase a participation in the loan. The following is a description of each of the major categories of loans which we make.

Commercial Loans. This category includes loans made to business entities for a variety of business purposes. We place particular emphasis on loans to small- to medium-sized professional firms, retail and wholesale businesses, and light industry and manufacturing concerns operating in our principal markets. We consider “small businesses” to include those with generally less than $10 million in sales. Our commercial loans include term loans with variable interest rates secured by equipment, inventory, receivables and real estate, as well as secured and unsecured working capital lines of credit. The risks of these types of loans depend on the general business conditions in the local economy and the borrowers’ ability to sell its products and services in order to generate sufficient business profits to repay their loans under the agreed upon terms and conditions. Personal guarantees are obtained from the principals of business borrowers, and sometimes third parties, to further support the borrowers’ ability to service the debt and reduce the risk of non-payment.

Commercial Real Estate Loans. Commercial real estate loans are offered to developers of both commercial and residential properties. Interest rates may be fixed or adjustable. We manage credit risk associated with these loans by actively monitoring such measures as advance rate, cash flow, collateral value and other appropriate credit factors. Risks associated with commercial real estate loans include the general risk of the failure of the commercial borrower, which is different for each type of business and commercial entity. We evaluate each business on an individual basis. We attempt to reduce credit risks in the commercial real estate loan portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio established by independent appraisals does not exceed 80%. In addition, we typically require personal guarantees of the principal owners.

Construction and Development Loans. In the current environment, First Community Bank is not making construction and development loans. As of December 31, 2010, our construction real estate portfolio consisted of 54% residential and 46% commercial for a total of $2,658,000 in construction loans.

Residential Real Estate Loans. Adjustable or fixed-interest rate residential real estate loans are made to qualified individuals for the purchase of existing single-family residences in our principal markets. We make these loans in accordance with our appraisal policy and real estate lending policy which detail maximum loan-to-value ratios and maturities. We believe that these loan-to-value ratios are sufficient to compensate us for normal fluctuations in real estate market values and minimize losses that could result from a downturn in the residential real estate market. Our residential real estate loans are primarily in Florida.

Consumer and Installment Loans. Consumer loans include lines of credit and term loans secured by second mortgages on the residences of borrowers for a variety of purposes, including home improvements, education and other personal expenditures. Consumer loans also include installment loans to individuals for personal, family and household purposes, including automobile and boat loans and pre-approved lines of credit. Consumer loans generally involve more risk than mortgage loans because the collateral for a defaulted loan may not provide an adequate source of repayment of the principal. This risk is due to the potential for damage to the collateral or other loss of value, and the fact that any remaining deficiency often does not warrant further collection efforts. In addition, consumer loan performance depends on the borrower’s continued financial stability and is, therefore, more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Other Services and Products. In addition to the deposit and loan products discussed above, we also provide:

 

•    Cash management services

 

•    Sweep accounts

•    Telephone banking

 

•    Safe deposit boxes

•    Traveler’s checks

 

•    eStatements

•    Deposit pick-up for commercial customers

 

•    Wire transfers and ACH services

•    Online banking/bill payment services

 

•    1031 Exchange Services

 

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•    Automatic drafts for various accounts

 

•    Debit cards

•    Certificate of Deposit Account Registry Service (CDARS)

 

•    Direct deposit of payroll and social security checks

•    VISA® and MasterCard® credit card services through our correspondent banks.

 

•    Health Saving Accounts (HSA)

We offer extended banking hours (both drive-in and lobby) and an after-hours depository and are associated with a shared network of automated teller machines that customers may use throughout our market areas and other regions. We are also associated with third party Internet banking service providers that enable us to provide customers with cost effective, secure and reliable Internet banking services.

Asset and Liability Management

Our main assets are cash and cash equivalents, our loan portfolio and our investment portfolio. Our liabilities consist primarily of deposits. Our objective is to support asset growth through the growth of core deposits, which include deposits of all categories made by individuals, partnerships, corporations and other entities. Consistent with the requirements of prudent banking necessary to maintain liquidity, we seek to match maturities and rates of loans and the investment portfolio with those of deposits, although exact matching is not always possible. The largest portion of our assets is invested in real estate, commercial and consumer loans. Our investment portfolio consists primarily of marketable securities of the United States government and federal agencies, generally with varied maturities.

Our asset/liability mix is monitored on a regular basis with a quarterly report detailing interest-sensitive assets and interest-sensitive liabilities. The objective of this policy is to control interest-sensitive assets and liabilities in order to minimize the impact of substantial movements in interest rates on our earnings.

Customers

The consolidation of the Florida banking industry over the last several years has created significant opportunities for community-oriented banks such as ours to build a successful, locally managed bank. We believe that many of the larger financial institutions do not provide the high level of personalized services desired by many small and medium-sized businesses and their principals. Our marketing efforts are focused on attracting small and medium-sized businesses and individuals, including service companies, manufacturing companies, commercial real estate developers, entrepreneurs and professionals, such as engineers, physicians, CPAs, architects and attorneys.

While a significant portion of our lending effort is concentrated on commercial and professional businesses, emphasis is also placed on generating a significant amount of consumer business. Many of our consumer customers are the principals and employees of our small and medium-sized business customers. We believe in old-fashioned “relationship banking,” where each customer can identify and establish a comfort level with our bank officers. We intend to continue to develop our consumer business with individuals who appreciate a high level of personal service, contact with their loan officer and responsive decision-making. Most of our business is developed through our loan officers and members of our board of directors and by pursuing an aggressive strategy of calling on customers and potential customers throughout our principal market areas.

Information About Our Primary Markets

Pinellas, Hillsborough, Pasco and Charlotte Counties are considered to be our primary market areas. Pinellas County, located on Florida’s Gulf Coast, is a peninsula bordered by the Gulf of Mexico on the west and by Tampa Bay on the east. Pinellas County estimated its population in 2010 at 926,217. Two of the top five beaches in the United States are located along the 588 miles of Pinellas County coastline, according to America’s Best Beaches’ List. St. Petersburg is nicknamed the “Sunshine City,” and averages 361 sunny days every year, and is located in southeast Pinellas County. St. Petersburg is also home to the MLB Tampa Bay Rays. Top key business segments in Pinellas County are services industries, light manufacturing and financial services. Pinellas County has received the “Successful Community Award” for creating a special metropolitan region by improving housing, expanding recreational opportunities and protecting the environment.

Hillsborough County is located midway along the west coast of Florida and is contiguous with Pinellas County. As of 2010, Hillsborough County estimated its population at 1,200,754. The City of Tampa is the largest city in Hillsborough County and is the third most populous city in Florida. It is approximately 20 miles northeast of St. Petersburg. Hillsborough’s key business segments include tourism, agriculture, construction, finance, health care, government, technology, and the port of Tampa, which is the seventh largest in the U.S. Tampa, is home to both the NFL Tampa Bay Buccaneers and the NHL Tampa Bay Lightning.

 

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Pasco County, located on the Gulf of Mexico in the Tampa Bay area, is part of a nine-county region referred to as the “Nature Coast.” Pasco County estimated its population to be approximately 440,616 in 2010. Located in the rolling hills of eastern Pasco County, Dade City is the county seat. Pasco County’s economy has historically been tied to agriculture; however, over time it has shifted more to service, government and retail. Pasco County has a total of 745 square miles with more than 100 square miles of managed recreational facilities, including parks, four artificial reefs (one made up of surplus military tanks), more than 25 golf courses, and three State-designated canoe trails.

Charlotte County is located between Lee County (Fort Myers) and Sarasota County in Southwest Florida on the Gulf of Mexico. Charlotte County estimated its population in 2010 at 166,023. Port Charlotte, the county’s geographical center, is approximately 100 miles south of St. Petersburg. Charlotte County features over 70 parks and recreational areas, including Charlotte Harbor, which is the 17th largest estuary in the Nation and the 2nd largest estuary in the State encompassing 270 square miles. The top two business segments of the County are service industries and construction. Charlotte County has been designated one of the top ten sailing destinations by SAIL magazine, and ranked 3rd “Best in America” place to live and golf by Golf Digest.

Competition

We are subject to intense competition from a variety of different competitors in our primary market areas in all phases of our operations. These competitors include:

 

   

Large national and super-regional financial institutions that have well-established branches and significant market share in the communities we serve;

 

   

Finance companies, investment banking and brokerage firms, and insurance companies that offer bank-like products;

 

   

Credit unions, which can offer highly competitive rates on loans and deposits because they receive tax advantages not available to commercial banks;

 

   

Other community banks, including start-up banks that can compete with us for customers who desire a high degree of personal service;

 

   

Technology-based financial institutions including large national and super-regional banks offering on-line deposit, bill payment, and mortgage loan application services; and

 

   

Both local and out-of-state trust companies and trust service offices.

Other existing community banks with whom we compete, and many new community bank start-ups, have marketing strategies similar to ours. These other community banks may open new branches in the communities we serve and compete directly for customers who want the level of service offered by community banks. Other community banks also compete for the same management personnel in Florida.

Various legislative actions in recent years have led to increased competition among financial institutions. With the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and other laws and regulations affecting interstate bank expansion, it is easier for financial institutions located outside of the State of Florida to enter the Florida market, including our targeted markets. In addition, recent legislative and regulatory changes and technological advances have enabled customers to conduct banking activities without regard to geographic barriers, through computer and telephone-based banking and similar services. There can be no assurance that the United States Congress, the Florida Legislature, or the applicable bank regulatory agencies will not enact legislation or promulgate rules that may further increase competitive pressures on us.

Personnel

At December 31, 2010, First Community had three officers and no other employees and First Community Bank had 90 full-time employees and 2 part-time persons. First Community Lender Services, Inc. has no employees of its own and operates using employees of First Community Bank.

SUPERVISION AND REGULATION

General

First Community is a registered unitary savings and loan holding company within the meaning of the Home Owners’ Loan Act (“HOLA”). First Community and First Community Bank, operate in a highly regulated environment. Our business activities, which are governed by statute, regulation and administrative policies, are supervised by a number of federal bank regulatory agencies, including the Office of Thrift Supervision, the Federal Deposit Insurance Corporation (“FDIC”) and, to a limited extent, the Federal Reserve Board. The following is a brief summary of the more recent legislation that affects our company and our subsidiaries.

 

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Regulation of the Holding Company

Restrictions on the Acquisition of Savings Institutions. Under the change in Bank Control Act, no person may acquire control of a federal savings bank or its parent holding company, directly or indirectly, unless the Office of Thrift Supervision has been given 60 days prior written notice and has issued a notice discussing the proposed acquisition. In addition, regulations provide that no company may acquire control of a federal savings bank without the prior approval of the Office of Thrift Supervision. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Office of Thrift Supervision. Control in this context means ownership, control of, or holding proxies representing more than 25% of the voting shares of, an insured institution, the power to control in any manner the election of a majority of the directors of such institution or the power to exercise a controlling influence over the management or policies of the institution.

The Office of Thrift Supervision also has established certain rebuttable control determinations. An acquirer must file for approval of control with the Office of Thrift Supervision, or file to rebut the presumptions before surpassing a rebuttable control level of ownership. To rebut the presumption, the acquirer must file a submission with the Office of Thrift Supervision setting forth the reasons for rebuttal. The submission must be filed when the acquirer acquires more than 25% of any class of voting stock of the savings bank and when they have any of the control factors enumerated in 12 C.F.R. Section 574.4(c) which include, but are not limited to:

 

   

The acquirer would be one of the two largest stockholders of any class of voting stock;

 

   

The acquirer and/or the acquirer’s representative or nominees would constitute more than one member of the savings bank’s board of directors; and

 

   

The acquirer or nominee or management official of the acquirer would serve as the chairman of the board of directors, chairman of the executive committee, chief executive officer, chief operating officer, chief financial officer, or in any similar policy making authority in the savings bank.

Support of Subsidiary Depository Institutions. The OTS does not impose consolidated or unconsolidated regulatory capital requirements on thrift holding companies. However, OTS-regulated holding companies are expected to have sufficient levels of capital to support their respective risk profiles. Pursuant to the Orders entered into with the OTS on February 24, 2011, within sixty (60) days the Company must adopt a detailed capital plan with specific strategies for addressing the capital needs of it and First Community Bank.

Payment of Dividends. There are statutory and regulatory limitations on the payment of dividends by First Community Bank as prescribed by the Office of Thrift Supervision’s capital distribution regulation. Under the regulation, First Community Bank may make a capital distribution without the approval of the Office of Thrift Supervision, provided the Office of Thrift Supervision is notified 30 days before declaration of the capital distribution. First Community Bank must also meet the following requirements:

 

   

It is not of supervisory concern, and will remain adequately or well-capitalized, as defined in the Office of Thrift Supervision prompt corrective action regulations, following the proposed distribution; and

 

   

The distribution does not exceed First Community Bank’s net income for the calendar year-to-date, plus retained net income for the previous two calendar years (less any dividends previously paid).

If First Community Bank does not meet the above-stated requirements, it must obtain the prior approval of the Office of Thrift Supervision before declaring any proposed distributions. The Office of Thrift Supervision can prohibit a proposed capital distribution by a savings institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such distribution would constitute an unsafe or unsound practice. First Community Bank has never paid a dividend; instead earnings are reinvested in First Community Bank to support our current growth rate.

In addition, our participation in the Troubled Asset Relief Program Capital Purchase Program (“CPP”) with the United States Department of the Treasury (“Treasury”) has limited our ability to declare or pay dividends on any of our shares. Specifically, under the Purchase Agreement with the Treasury, we are unable to declare dividend payments on common, junior preferred or pari passu preferred shares if it is in arrears on the dividends on the Series A Preferred Stock. In addition, our ability to repurchase shares is restricted. Treasury consent generally is required for us to make any stock repurchase until the third anniversary of the investment by the Treasury unless all of the Series A Preferred Stock has been redeemed or transferred. Further, common, junior preferred or pari passu preferred shares may not be repurchased if we are in arrears on the Series A Preferred Stock dividends.

Further, as described above, under the OTS Orders First Community cannot accept or request First Community Bank to pay any dividends or make other capital distributions or declare or pay any dividends or other capital distributions without prior written approval of the OTS, with the exception of paying dividends on the Series A Preferred Stock.

 

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Regulation of First Community Bank

Minimum Capital Requirements. Both the Office of Thrift Supervision and the FDIC have promulgated regulations setting forth capital requirements applicable to depository institutions. The Office of Thrift Supervision capital regulations require savings institutions to meet three minimum capital standards:

 

   

A 1.5% tangible capital ratio (defined as the ratio of tangible capital to adjusted total assets);

 

   

A 4% leverage (core capital) ratio (defined as the ratio of core capital to adjusted total assets); and

 

   

An 8% total risk-based capital standard as defined below.

Core capital is defined as common stockholder’s equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries, certain goodwill and certain mortgage servicing rights less certain intangible assets, mortgage servicing rights less certain intangible assets, mortgage servicing rights and investments in non-includable subsidiaries. Tangible capital is defined in the same manner as core capital, except that all intangible assets (excluding certain mortgage servicing rights) must be deducted. Adjusted total assets is defined as GAAP total assets, minus intangible assets (except those included in core capital). The Office of Thrift Supervision regulations also require that in calculating the leverage ratio, tangible and risk-based capital standards, savings institutions must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank.

The Office of Thrift Supervision risk-based capital standard for savings institutions requires that total capital (comprised of core capital and supplementary capital) be at least 8% of risk-weighted assets. In determining risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the Office of Thrift Supervision capital regulation based on the risks Office of Thrift Supervision believes are inherent in the type of asset. Generally, zero weight is assigned to risk-free assets, such as cash and unconditionally guaranteed United States Government securities. A weight of 20% is assigned to, among other things, certain obligations of United States Government-sponsored agencies (such as the FNMA and the FHLMC) and certain high quality mortgage-related securities. A weight of 50% is assigned to qualifying mortgage loans and certain other mortgaged-related securities, repossessed assets and assets that are 90 days or more past due.

The components of core capital are equivalent to those discussed above. The components of supplementary capital include permanent capital instruments (such as cumulative perpetual preferred stock, mandatory convertible subordinated debt and perpetual subordinated debt), maturing capital instruments (such as mandatory convertible subordinated debt and intermediate-term preferred stock) and the allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.

On September 30, 2010, First Community Bank became adequately capitalized as an additional $6.7 million was added to the provision for loan losses due to the augmented level of nonperforming loans. At December 31, 2010, First Community Bank’s tangible capital, core capital, and risk-based capital ratios were 5.81%, 8.37%, and 9.65%, respectively. See Note 15 to the consolidated financial statements for additional information regarding regulatory capital levels and percentages.

Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective Action Regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings banks, such as requiring compliance with a capital restoration plan, restricting asset growth, acquisitions, branching and new lines of business and, in extreme cases, appointment of a receiver or conservator. The severity of the action required or authorized to be taken increases as a savings bank’s capital deteriorates. There are five regulatory capital categories, including “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Generally, a savings bank is categorized as “well capitalized” if:

 

   

its total capital is at least 10% of its risk-weighted assets;

 

   

its core capital is at least 6% of its risk-weighted assets;

 

   

its core capital is at least 5% of its adjusted total assets; and

 

   

it is not subject to any written agreement, order, capital directive or prompt corrective action directive issued by the OTS, or certain regulations, to meet or maintain a specific capital level for any capital measure.

First Community Bank currently meets the requirements for classification as “adequately capitalized.” Pursuant to the Orders entered into with the OTS on February 24, 2011, First Community Bank within sixty (60) days, must submit a written plan for First Community Bank to achieve by June 20, 2011, and thereafter maintain, a Tier 1 Capital Ratio equal to or greater than eight percent (8%) and a Total Risk-Based Capital Ratio equal to or greater than thirteen percent (13%). See Note 15 to the consolidated financial statements for additional information regarding regulatory capital levels and percentages.

 

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Transactions with Affiliates. Our authority to engage in certain transactions with related entities or “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act (“FRA”) and Regulation “W” adopted by the Federal Reserve. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution’s capital and surplus.

Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in the FRA and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and circumstances, including credit standards, that are substantially the same or at least as favorable to the savings institution as those prevailing at the time for comparable transactions with a non-related party or non-affiliated holding company. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards that in good faith would be offered to or would apply to non-related parties or non-affiliated companies. Notwithstanding Sections 23A and 23B, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956. Further, no savings institution may purchase the securities of any affiliate other than a subsidiary.

Loans to Insiders. Sections 22(g) and 22(h) of the FRA and Regulation O (which set limits on extensions of credit to executive officers, directors and 10% stockholders, as well as companies which such persons control) apply to savings institutions. Among other things, such loans must be made on terms, including interest rates, substantially the same as loans to unaffiliated individuals and which involve no more than the normal risk of collectability. These regulations also place limits on the amount of loans we may make to such persons. These restrictions apply in addition to certain restrictions on transactions with affiliates contained in the Office of Thrift Supervision regulations.

Standards for Safety and Soundness. The FDICIA, as amended by the Reigle Community Development and Regulatory Improvement Act of 1994, requires each federal banking agency to prescribe standards relating to internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate for all insured depository institutions and their holding companies. The Office of Thrift Supervision and the other federal banking agencies adopted a rule establishing deadlines for the agencies to submit and review safety and soundness compliance plans and Interagency Guidelines Establishing Standards for Safety and Soundness. The guidelines require depository institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution’s business.

The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate-risk exposure, and asset growth. The guidelines further provide that savings institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and that they should take into account factors such as compensation practices at comparable institutions. The Interagency Guidelines also include asset quality and earnings standards.

If the Office of Thrift Supervision determines that a savings institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A savings institution is required to submit an acceptable compliance plan to the Office of Thrift Supervision within 30 days after receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions.

Insurance of Deposit Accounts. The FDIC currently maintains the Deposit Insurance Fund (“DIF”), which was created in 2006 in the merger of the Bank Insurance Fund and Savings Association Insurance Fund. The deposit accounts of First Community Bank are insured by the DIF to the maximum amount provided by law. This insurance is backed by the full faith and credit of the United States Government.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by DIF-insured institutions. It also may prohibit any DIF-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against insured institutions.

The FDIC’s regulations for risk-based deposit insurance assessments establish four Risk Categories. Risk Category I is for well-capitalized institutions that are financially sound with only a few minor weaknesses. Risk Categories II, III and IV present progressively greater risks to the DIF. Effective April 1, 2009, Risk Category I institutions pay quarterly assessments for deposit insurance at annual rates of 12 to 16 basis points. The rates for Risk Categories II, III and IV are 22, 32 and 45 basis points, respectively. With advance notice to insured institutions, rates are subject to change. Within Risk Category I, the precise rate for an individual institution with less than $10 billion in assets is generally determined by a formula using CAMELS ratings, which are assigned in examinations, and financial ratios. A different method applies for larger institutions. The rate for an individual institution is applied to it is assessment base, consisting generally of its deposit liabilities subject to certain adjustments.

 

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The FDIC is authorized to raise the assessment rates in certain circumstances, which would affect savings institutions in all risk categories. The FDIC is also authorized to impose special assessments. The FDIC has exercised its authority to raise assessment rates and impose special assessments several times in the past, including during 2009, and could raise rates and impose special assessments in the future. Increases in deposit insurance premiums and the imposition of special assessments would have an adverse effect on our earnings.

The FDIC also collects assessments against the assessable deposits of insured institutions to service the debt on bonds issued during the 1980’s to resolve the thrift bailout. During the year ended December 31, 2010, the quarterly assessments averaged approximately .000026% of assessable deposits, and First Community Bank paid approximately $46,000 in assessments.

Qualified Thrift Lender Test (“QTL”). The HOLA requires savings institutions to meet a QTL test. The QTL test, as amended by the FDICIA, requires a savings institution to maintain at least 65% of its “portfolio assets” (as defined by regulation) in qualified thrift investments, primarily residential mortgages and related investments on a monthly basis in nine out of every 12 months. The definition of portfolio assets has recently been amended to include the small business loans upon which we focus. As of December 31, 2010, we exceeded the QTL test, maintaining approximately 90% of our portfolio assets in qualified thrift investments.

Interstate Banking. Federally-chartered savings institutions are allowed to branch nationwide to the extent allowed by federal statute. This ability permits savings institutions with interstate networks to diversify their loan portfolios and lines of business. The Office of Thrift Supervision authority preempts any state law purporting to regulate branching by federal savings institutions. Prior approval of the Office of Thrift Supervision is required for a savings institution to branch interstate or intrastate. To obtain supervisory clearance for branching, an applicant’s regulatory capital must meet or exceed the minimum requirements established by law and by the Office of Thrift Supervision regulations. In addition, the savings institution must have a satisfactory record under the Community Reinvestment Act (“CRA”). First Community Bank does not conduct interstate branching operations and does not plan to do so in the foreseeable future.

The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”), which does not apply to federally-chartered savings institutions, eliminated many existing restrictions on interstate banking by authorizing interstate acquisitions of financial institutions by bank holding companies without geographic limitations. Under the Interstate Act, existing restrictions on interstate acquisitions of banks by bank holding companies were repealed. Bank holding companies located in Florida are able to acquire any Florida-based bank, subject to certain deposit percentage and other restrictions. The legislation also provides that de novo branching by an out-of-state bank is permitted only if it is expressly permitted by the laws of the host state. The authority of a bank to establish and operate branches within a state is subject to applicable state branching laws. Florida law permits interstate branching through the acquisition of a bank in existence for more than three years, but prohibits de novo branching by out of state banks.

Office of Thrift Supervision Assessments. Savings institutions are required by Office of Thrift Supervision regulation to pay assessments to the Office of Thrift Supervision to fund the operations of the Office of Thrift Supervision. The general assessment, to be paid on a semiannually basis, is computed upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the institution’s latest quarterly thrift financial report.

The Office of Thrift Supervision also assesses fees to savings and loan holding companies such as First Community. The semi-annual assessment for savings and loan holding companies includes a $3,000 base assessment with an additional assessment based on the savings and loan holding company’s risk or complexity, organizational form and condition.

Federal Home Loan Bank System. First Community Bank is a member of the Federal Home Loan Bank (“FHLB”) system, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. As a member of the FHLB-Atlanta, First Community Bank is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 4.5% of our advances (borrowings) from the FHLB-Atlanta plus 8% of certain assets sold to the FHLB-Atlanta. We are in compliance with this requirement. FHLB advances must be secured by specified types of collateral and may be obtained only for the purpose of providing funds for residential housing finance.

The FHLBs are required to provide funds for the resolution of insolvent savings institutions and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to members. For the year ended December 31, 2010, dividends paid by the FHLB-Atlanta to First Community Bank amounted to approximately $9,000, at a yield of 0.36% on our investment. Should dividends be reduced, or interest on FHLB advances increased, our consolidated net interest income might also be reduced. Furthermore, there can be no assurance that the value of the FHLB-Atlanta stock we hold will not decrease as a result of any new legislation.

 

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Federal Reserve System. Federal Reserve regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve regulations generally require that reserves of 3% must be maintained against aggregate transaction accounts of $40.6 million or less (subject to adjustment by the Federal Reserve) and an initial reserve of $1,218,000 plus 10% of accounts in excess of $40.6 million. The first $6.6 million of otherwise reversible balances (subject to adjustments by the Federal Reserve) are exempted from the reserve requirements. We are in compliance with the foregoing requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements imposed by the Office of Thrift Supervision.

Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve or a pass-through account as defined by the Federal Reserve, the effect of this reserve requirement is to reduce our interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve discount window; however, Federal Reserve regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve discount window.

Emergency Economic Stabilization Act

On October 14, 2008, the U.S. Department of Treasury (“Treasury”) announced a program under the Emergency Economic Stabilization Act of 2008 (“EESA”). Pursuant to this program, Treasury would make preferred stock investments in participating financial institutions (the “Capital Purchase Program” or “CPP”). On February 17, 2009, President Obama signed into law the America Reinvestment and Recovery Act of 2009 (“ARRA”) which amended EESA, thereby revising certain compensation and governance restrictions in EESA applicable to CPP participants. Treasury has also issued regulations implementing various provisions of EESA, as amended by ARRA. Throughout this report, we refer to EESA to mean EESA as amended by ARRA and as implemented pursuant to regulations issued by Treasury.

First Community participated in the Capital Purchase Program by selling preferred stock and related common stock purchase warrants to Treasury. As a result of its participation in the CPP, First Community became subject to the compensation and governance restrictions implemented by EESA, which apply to our Senior Executive Officers (“SEOs”) and other highly paid employees. A discussion of the compensation and governance restrictions follows below.

Risk Review: EESA prohibits First Community from providing incentive compensation arrangements that encourage its SEOs to take unnecessary and excessive risks that threaten the value of the financial institution or that would encourage manipulation of the reported earnings in order to enhance the compensation of any of its employees. EESA requires the Compensation Committee to meet with First Community’s senior risk officer at least semiannually to evaluate and assess the risks posed by employee compensation plans and to certify that such plans do not encourage: (i) the SEOs to take unnecessary and excessive risks that threaten the value of First Community; and (ii) manipulation of the reported earnings in order to enhance the compensation of any of First Community’s employees.

Bonuses and Incentive Compensation: EESA prohibits the payment of any “bonus, retention award, or incentive compensation” to First Community’s most highly-compensated employee. The prohibition includes several limited exceptions, including payments under enforceable agreements that were in existence as of February 11, 2009 and limited amounts of “long-term restricted stock.”

Golden Parachutes: EESA prohibits any severance payment to an SEO or any of the next five most highly-compensated employees upon termination of employment for any reason. EESA provides an exception for amounts that were earned or accrued prior to termination, such as normal retirement benefits.

Clawbacks: EESA requires First Community to recover any bonus or other incentive payment paid to an SEO or any of the next 20 most highly compensated employees on the basis of materially inaccurate financial or other performance criteria.

Limit on Tax Deduction: For years in which the Treasury owns our preferred stock, First Community may not claim a deduction for compensation paid to a SEO in excess of the $500,000 compensation deduction limit of Section 162(m)(5) of the Internal Revenue Code, including certain performance-based pay previously excluded.

Policy on Luxury Expenditures: EESA required First Community to enact policy regarding excessive or luxury expenditures, which policy covers expenditures on entertainment, events, office and facility renovations, air and other travel and other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives or other similar measures conducted in the normal course of business.

Shareholder “Say-on-Pay” Vote Required: EESA requires First Community to include a non-binding shareholder vote to approve the compensation of executives as disclosed in its proxy statement.

Executive Certifications: EESA requires First Community’s CEO and CFO to provide a written certification of compliance with the executive compensation restrictions under EESA in its annual report on Form 10-K filed with the Securities and Exchange Commission.

 

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As a condition to the closing of the CPP transaction, each of Kenneth P. Cherven, our Chief Executive Officer, Stan B. McClelland, our former Chief Financial Officer, Scott C. Boyle, our Regional President – Pinellas County, Michael J. Bullerdick, our former Regional President – Charlotte County, and Clifton E. Tufts, our Executive Vice President: (a) executed a waiver voluntarily waiving any claim against the Treasury or First Community for any changes to such officer’s compensation or benefits that are required to comply with the regulations issued by the Treasury under the CPP and acknowledging that the regulation may require modification of the compensation arrangements and agreements (including so-called “golden parachute” agreements) as they relate to the period the Treasury holds any securities of First Community acquired through the CPP; and (b) entered into a Capital Purchase Program Compliance Agreement with First Community so amending such compensation arrangements and agreements.

Future Legislation

Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds, are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Such legislation may change banking statutes and the operating environment of First Community and First Community Bank in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of First Community or First Community Bank. With the recent enactments of EESA and ARRA, the nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time. We cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.

Other Laws. State usury and credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. Our loans are also subject to federal laws applicable to credit transactions, such as the:

 

   

Federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;

 

   

Community Reinvestment Act, which requires financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low- and moderate-income borrowers;

 

   

Home Mortgage Disclosure Act requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;

 

   

Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibitive factors in extending credit;

 

   

Real Estate Settlement Procedures Act, which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;

 

   

Fair Credit Reporting Act governing the manner in which consumer debts may be collected by collection agencies; and

 

   

Rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws. Our operations are also subject to the:

 

   

Privacy provisions of the Gramm-Leach-Bliley Act of 1999, which require us to maintain privacy policies intended to safeguard consumer financial information, to disclose these policies to our customers, and to allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;

 

   

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

 

   

Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of debit cards, automated teller machines and other electronic banking services.

Financial Modernization. The Gramm-Leach-Bliley Act of 1999 sought to achieve significant modernization of the federal bank regulatory framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the Gramm-Leach-Bliley Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of such firms in a “financial services holding company”. We have no immediate plans to utilize the structural options created by the Gramm-Leach-Bliley Act, but we may develop such plans in the future.

 

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Anti-Terrorism and Anti-Money Laundering Regulations. After the September 11, 2001 terrorist attacks in New York and Washington, D.C., the United States government acted in several ways to tighten control on activities perceived to be connected to money laundering and terrorist funding. A series of orders were issued which identified terrorists and terrorist organizations and required the blocking of property and assets of, as well as prohibiting all transactions or dealings with, such terrorists, terrorist organizations and those that assist or sponsor them. The USA Patriot Act:

 

   

Substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States;

 

   

Imposes new compliance and due diligence obligations;

 

   

Creates new crimes and penalties;

 

   

Compels the production of documents located both inside and outside the United States; including those of foreign institutions that have a correspondent relationship in the United States; and

 

   

Clarifies the safe harbor from civil liability to customers.

In addition, the United States Treasury Department issued regulations in cooperation with the federal banking agencies, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Department of Justice to:

 

   

Require customer identification and verification;

 

   

Expand the money-laundering program requirement to the major financial services sectors; including insurance and unregistered investment companies, such as hedge funds; and

 

   

Facilitate and permit the sharing of information between law enforcement and financial institutions, as well as among financial institutions themselves.

The United States Treasury Department also has created the Treasury USA Patriot Act Task Force to work with other financial regulators, the regulated community, law enforcement and consumers to continually improve the regulations.

Sarbanes-Oxley Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“Act”). The Securities and Exchange Commission (“SEC”) has promulgated certain regulations pursuant to the Act and will continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subject publicly traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase our operating expenses. The effective date of the application of the provision of Section 404 of the Act concerning independent auditor attestation of internal control compliance reporting for non-accelerated filers such as First Community has been extended to the first fiscal year ending on or after June 15, 2010.

 

Item 1A. Risk Factors

Risks Related to the Conduct of Our Business

We are required to maintain capital to meet regulatory requirements and current level of losses may require us to raise additional capital in the future. If we fail to maintain sufficient capital, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

We are required by the OTS and the FDIC to maintain adequate levels of capital to support our operations. Both the OTS and the FDIC have promulgated regulations setting forth capital requirements applicable to depository institutions. In addition, we are required by the OTS Orders to adopt a detailed capital plan with specific written strategies to preserve and enhance the capital level of First Community Bank.

The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital ratio (defined as the ratio of tangible capital to adjusted total assets); a 4% leverage (core capital) ratio (defined as the ratio of core capital to adjusted total assets); and an 8% risk-based capital standard as defined below.

Under the terms of the OTS Order, by June 30, 2011, First Community Bank shall have and maintain a Tier 1 (core) Capital Ratio equal to or greater than eight percent (8%) and a Total Risk-Based Capital Ratio equal to or greater than thirteen percent (13%). If First Community Bank fails to meet these capital requirements, it would be required to file a Contingency Plan with the OTS to either merge with, or be acquired by, another federally insured depository institution or holding company or voluntarily dissolve by filing an appropriate application with the OTS. There can be no assurance that we will be able to meet these capital requirements.

 

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If we fail to satisfy these capital ratios and other regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.

Current levels of market volatility have been significant and recent negative developments in the financial services industry and the credit markets may continue to adversely impact our operations, financial performance and stock price.

The capital and credit markets have been experiencing volatility and disruption for more than eighteen months. In some cases, the markets have placed downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial condition or performance. If current levels of market disruption and volatility continue or worsen, we may experience additional adverse effects, which may be material, on our ability to maintain or access capital and on our business, financial condition and results of operations.

Since December 2007, negative developments in the capital markets have resulted in uncertainty in the financial markets in general, with the expectation of the general economic downturn continuing well into or beyond 2010. Loan portfolio performance has deteriorated at many financial institutions, including ours, resulting from, among other factors, a weak economy, high unemployment and a decline in the value of the collateral supporting loans. The competition for deposits has increased significantly due to liquidity concerns at many of these same institutions. Stock prices of bank holding companies, like ours, have been negatively affected by the current condition of the financial markets, as has our ability, if needed, to raise capital, compared to prior years.

Recent legislation in response to market and economic conditions may significantly affect our operations, financial condition, and earnings.

In response to the financial crisis affecting the banking system and financial markets, the United States Congress enacted the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. Under these and other laws and government actions:

 

   

the U.S. Department of the Treasury, or “Treasury,” has provided capital to financial institutions and adopted programs to facilitate and finance the purchase of problem assets and finance asset-backed securities via the Troubled Assets Relief Program, or “TARP”;

 

   

the FDIC has temporarily increased the limits on federal deposit insurance and has also provided a temporary liquidity guarantee, or “TLG,” of all FDIC-insured institutions and their affiliates’ debt, as well as deposits in noninterest-bearing transaction deposit accounts; and

 

   

the federal government has undertaken various forms of economic stimulus, including assistance to homeowners in restructuring mortgage payments on qualifying loans.

The TARP and TLG programs are winding down, and the effects of this wind-down cannot be predicted.

Our federal thrift charter may be eliminated under the federal government’s Financial Regulatory Reform Plan. Congress has proposed legislation that would significantly change the regulation of banks and thrifts, including the consolidation of the Office of the Comptroller of the Currency, which currently charters and supervises nationally chartered banks, and the OTS, which supervises federally chartered thrift and thrift holding companies, such as us. In addition, under the legislative proposal, the thrift charter, under which First Community Bank is organized, would be eliminated. If the proposal is finalized, we or our subsidiaries may be subject to a new charter. There is no assurance as to how this new charter, or the supervision by the new regulatory agency, will affect our operations going forward.

In addition, the Federal government is considering various other proposals for a comprehensive overhauling reform of the financial services industry and markets and is coordinating reforms with other countries. There can be no assurance that these various initiatives or any other future legislative or regulatory initiatives will be successful at improving economic conditions globally, nationally or in our markets, or that the measures adopted will not have adverse consequences.

Changes in business and economic conditions, in particular those of the Florida markets in which we operate, could continue to lead to lower revenue, lower asset quality and lower earnings.

Unlike larger national or regional banks that are more geographically diversified, our business and earnings are closely tied to the economic conditions of the markets in which we operate in Florida. These local economies are heavily influenced by real estate, tourism and other service-based industries. Factors that could affect these local economies include declines in tourism, higher energy costs, higher unemployment rates, reduced consumer or corporate spending, natural disasters or adverse weather conditions, and the recent significant deterioration in general economic conditions. The current economic recession has been exacerbated by the devaluations of commercial and residential real estate in our markets. Unemployment has also been significant, with an unemployment rate in excess of 12% for all of Florida, and 11.7%, 11.6%, 13% and 12 % in Pinellas, Hillsborough, Pasco and Charlotte counties, respectively, as of December 31, 2010. A sustained economic downturn could further adversely affect the quality of our assets, credit quality, and the demand for our products and services, which could lead to lower revenue and lower earnings.

 

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The Florida economy continued to weaken during 2010. We believe population growth has stabilized for the State of Florida, but remains at a lower rate than in recent years. Visitor arrivals remained lower than in previous years and unemployment levels continued to increase compared to 2009 with similar trends expected throughout 2011. These trends have contributed to an increase in our non-performing loans and reduced asset quality. We continually monitor changes in the economy, including levels of visitor arrivals and spending, changes in housing prices, and unemployment rates. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolios, the potential losses associated with the nonperforming loans and the net realizable value of real estate owned.

We have incurred net losses for 2009 and 2010 and cannot make any assurances that we will not incur further losses.

We incurred net losses of $19.0 million and $4.9 million for the years ended December 31, 2010 and 2009, respectively. We cannot provide any assurances that we will not incur future losses, especially in light of economic conditions that continue to adversely affect our borrowers and us.

Current and further deterioration in the real estate market could cause further increases in delinquencies and non-performing assets, including loan charge-offs, and depress our results of operations.

Dramatic declines in the housing and commercial real estate markets over the past two years have negatively impacted credit performance of many financial institutions’ loans, including ours. Many lenders have reduced and, in some cases, ceased providing funding to borrowers, including other financial institutions, reflecting concern about the stability of financial markets and the strength of counterparties. This market turmoil and tightening of credit has led to increased levels of commercial and consumer delinquencies for other financial institutions, a lack of confidence in the financial sector, and increased volatility in the financial markets. The resulting economic pressure on consumers and lack of confidence in the financial markets may continue to adversely affect our business, financial condition and results of operations.

A significant portion of our loan portfolio consists of mortgages secured by real estate located in Pinellas, Hillsborough, Pasco and Charlotte counties of Florida. Real estate values and real estate markets are generally affected by, among other things, changes in national, regional or local economic conditions; fluctuations in interest rates and the availability of loans to potential purchasers; changes in the tax laws and other governmental statutes, regulations and policies; and acts of nature. Over the past two years, real estate prices in each of our markets have significantly declined. If real estate prices continue to decline in any of these markets, the value of the real estate collateral securing our loans could be further reduced. Such a reduction in the value of our collateral could increase the number of non-performing loans and adversely affect our financial performance.

As of December 31, 2010, our residential real estate secured loans; including lines of credit secured by real estate and commercial real estate secured loans comprised 41% and 38% of our loan portfolio, respectively. Continuation of the downturn could further depress our earnings and our financial condition because:

 

   

an increasing number of borrowers may not be able to repay their loans;

 

   

the value of the collateral securing our loans to borrowers may decline further;

 

   

the quality of our loan portfolio may decline further; and/or

 

   

Customers may not want or need our products and services.

Any of these scenarios could cause further increases in delinquencies and non-performing assets or require us to charge off a higher percentage of our loans and/or increase substantially our provision for loan losses, any of which would negatively impact our operating results.

Liquidity risks could affect operations and jeopardize our financial condition.

Liquidity is essential to our business. Asset liquidity is provided by cash and assets which are readily marketable 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 our primary markets. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. To date, we have relied on deposits, proceeds from sales of loans and securities, repurchase agreements and borrowings from the Federal Home Loan Bank as our major sources of funding. Brokered deposits constituted 9% of our total deposits as of December 31, 2010. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit, including federal funds purchased from correspondent banks and from the Federal Home Loan Bank.

 

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Our liquidity, on a parent only basis, is adversely affected by our current inability to receive dividends from First Community Bank without prior regulatory approval.

Our access to funding sources, including our ability to acquire additional non-core deposits, the issuance and sale of debt securities, and the issuance and sale of preferred or common securities in public or private transactions, could be adversely affected by factors that affect us specifically or the financial services industry or the economy generally. Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.

Since late 2007 through 2010, the financial services industry and the credit markets generally have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a lack of liquidity. The liquidity issues have been particularly acute for regional and community banks, as many larger correspondent lenders have significantly curtailed their lending to regional and community banks due to the increased levels of losses that they have suffered on such loans. In addition, many of the larger correspondent lenders have reduced or even eliminated Federal Funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. On February 12, 2010, we concluded a public stock offering which brought in approximately $10.4 million in new capital. However, there is no guarantee that we or First Community Bank will be able to raise additional capital to meet our liquidity needs. Our financial flexibility could be severely constrained if we are unable to renew our wholesale funding or if adequate funding is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan originations, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature.

We may be called upon to support First Community Bank.

Under OTS policy, First Community is viewed by the OTS to be a source of financial strength to and to commit resources to support First Community Bank. This support may be required at times when, in the absence of such OTS policy, First Community might not be inclined to provide such support. In addition, any capital loans by First Community to First Community Bank must be subordinate in right of payment to deposits and to certain other indebtedness of First Community Bank. In the event of bankruptcy, any commitment by a holding company to a federal bank regulatory agency to maintain the capital of a subsidiary depository institution will be assumed by the bankruptcy trustee and will be entitled to priority of payment.

Under the Federal Deposit Insurance Act, a depository institution of a holding company can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC, in connection with: (a) the default of a commonly controlled FDIC-insured depository institution; or (b) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution in danger of default.

Default is defined generally as the appointment of a conservator or a receiver and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.

Losses from loan defaults may exceed the allowance we establish for that purpose, which will have an adverse effect on our business.

We maintain an Allowance for Loan Losses to provide for anticipated losses inherent in our loan portfolio. The ALLL reflects management’s estimates and judgments of probable losses in the loan portfolio at the relevant balance sheet date. We evaluate the collectability of our loan portfolio and provide an ALLL that we believe is adequate based upon various factors including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and other loan concentrations, including commercial real estate concentrations. As a result of these considerations, we have from time to time increased our ALLL. For the quarter ended December 31, 2010, we recorded a provision for loan losses of $450,000, compared to $4.4 million for the fourth quarter of 2009.

We cannot be certain that our ALLL will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, or borrowers’ behavior towards repaying their loans. The credit quality of our borrowers has deteriorated as a result of the economic downturn in our markets. If the credit quality of our customer base or their debt service behavior materially decreases further, if the risk profile of a market, industry or group of customers declines further or weaknesses in the real estate markets and other economics persist or worsen, or if our ALLL is not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be materially adversely affected.

Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition.

At December 31, 2010, our non-performing loans were $34.5 million, or 10.01% of our loan portfolio, and our non-performing assets (which include foreclosed real estate) were $46 million, or 9.74% of total assets. In addition, at December 31, 2010, we had approximately $12.0 million in accruing loans that were 30 to 89 days delinquent. Our total criticized assets, which include special mentions and classified loans were $53.0 million as of December 31, 2010.

 

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Our non-performing assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to an increase in non-performing loans. We do not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. We do incur the costs of funding problem assets and other real estate owned, however. When we take collateral in foreclosures and similar proceedings, we are required to mark the collateral to its then fair value less expected selling costs, which, when compared to the principal amount of the loan, may result in a loss. These non-performing loans and other real estate owned also increase our risk profile and the capital our regulators believe is appropriate in light of such risks. Pursuant to the OTS Orders, First Community Bank has agreed to prepare, a detailed written plan with specific strategies and timeframes to reduce First Community Bank’s total level of criticized assets (the “Problem Asset Reduction Plan”). There can be no assurance that: (i) we will be able to reduce our criticized assets timely; (ii) we will not experience further increases in non-performing loans in the future; or (iii) we can reduce our criticized assets consistent with the Problem Asset Reduction Plan. Any of these actions may result in additional future credit losses and additional regulatory enforcement actions.

Our exposure to credit and regulatory risk is increased by our commercial real estate and commercial and industrial lending.

Commercial real estate and commercial and industrial lending have historically had higher credit risk than single-family residential lending. Such loans typically involve larger loan balances to a single borrower or related borrowers. At December 31, 2010, we had a balance of $161.6 million in commercial real estate loans (including construction and land development loans and multi-family residential loans) or 46.8% of total loans, and $17.7 million in commercial and industrial loans, or 5.1% of total loans.

At December 31, 2010, nonperforming commercial real estate (including construction and land development loans and multi-family residential loans) and commercial and industrial loans totaled $24.3 million and represented 7.04% of total loans compared to a balance of $13.2 million at December 31, 2009, which represented 3.24% of total loans.

Commercial real estate loans can be affected by adverse conditions in local real estate markets and the economy, generally because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties as well as other factors affecting residential real estate borrowers. These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property.

A commercial business loan is typically based on the borrower’s ability to repay the loan from the cash flows of the business. Such loans may involve risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise and liquidate, or fluctuate in value based on the success of the business. Because commercial real estate, commercial business and construction loans are vulnerable to downturns in the business cycle, further economic weakness could cause more of those loans to become nonperforming. The underwriting, review and monitoring performed by our officers and directors cannot eliminate all of the risks related to these loans. The banking regulators continue to give commercial real estate lending greater scrutiny, and require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of commercial real estate lending growth and exposures.

Real estate construction, land acquisition and development loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.

At December 31, 2010, we had construction, land acquisition and development loans of $2.7 million, or approximately 0.77% of our total loan portfolio. Such loans involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

 

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We are currently not permitted to originate or purchase any new nonresidential real estate loans until the OTS approves, and issues a non-objection to First Community Bank’s Capital Plan under the Orders.

We are exposed to environmental liabilities with respect to properties we operate or to which we take possession.

When we foreclose on commercial or industrial property or are deemed to “operate” collateral, we may become exposed to potential liability under applicable environmental laws. If hazardous substances are discovered on such property, we may be liable to governmental agencies or third parties for the costs of remediating the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. If we ever become subject to significant environmental liabilities, our financial condition, results of operations and cash flows could be materially and adversely affected.

Credit risk cannot be eliminated.

There are risks in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from economic and market conditions. For real estate loans, there are risks that the appraisal we obtain from a third-party appraiser of the value of properties proves to be overstated or market values or rental rates decline, which may result in inadequate security for the repayment of the loan. We attempt to reduce our credit risk through loan application approval procedures, monitoring the concentration of loans within specific industries and geographic location, the review and monitoring of our third-party appraisers and periodic independent reviews of outstanding loans by our loan review and audit departments as well as external auditors. While these procedures should reduce our risks, such risks can never be eliminated.

Changes in interest rates may negatively affect our earnings and the value of our assets.

Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions, competition and policies of various governmental and regulatory agencies and, in particular, the policies of the Board of Governors of the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest First Community Bank receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect: (i) First Community Bank’s ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities, including the held-to-maturity, available for sale, and trading securities portfolios; and (iii) the average duration of our interest-earning assets. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rates indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse affect on our financial condition and results of operations.

Our cost of funds may increase as a result of general economic conditions, interest rates and competitive pressures.

We have traditionally obtained funds principally through local deposits and we have a base of lower cost transaction deposits. Generally, we believe local deposits are a more stable source of funds than brokered deposits or other borrowings because local accounts typically reflect a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits. Our costs of funds and our profitability and liquidity are likely to be adversely affected, if and to the extent we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio. As of December 31, 2010, brokered deposits accounted for approximately $33.6 million, or approximately 9%, of our total consolidated deposits.

The costs of FDIC insurance and the TLG guarantees have increased and are expected to continue to adversely affect our results of operations.

FDIC insurance expense has increased, from $896,000 in 2009 to $1,079,000 for the year ending December 31, 2010. We expect to pay significantly higher FDIC premiums in the future, especially until our regulatory capital and risk profile improve. Bank failures have significantly depleted the FDIC’s Deposit Insurance Fund and reduced its ratio of reserves to insured deposits.

The FDIC has adopted a revised risk-based deposit insurance assessment schedule which raised deposit insurance premiums, and the FDIC also implemented a special assessment on all depository institutions. Additional special assessments may be imposed by the FDIC for future periods. We participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLG, for the noninterest-bearing transaction deposit accounts guarantee program but have opted out from the debt guarantee program. Banks that participate in the TLG’s noninterest-bearing transaction deposit account guarantee pay the FDIC a fee for such guarantee. These actions have significantly increased our noninterest expense in 2010 and are expected to increase our costs for the foreseeable future.

 

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We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies, including the Treasury as a result of our participation in the TARP Capital Purchase Program. Our compliance with these regulations is costly and restricts certain activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all financial institutions and financial institution holding companies, our cost of compliance could adversely affect our ability to operate profitably.

We are subject to various reporting requirements that increase compliance costs, and failure to comply timely could adversely affect our reputation and the value of our securities.

We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the Securities and Exchange Commission, the Public Company Accounting Oversight Board and NASDAQ. In particular, we are required to include management reports on internal controls as part of our Annual Report on Form 10-K pursuant to Section 404 of the Sarbanes-Oxley Act. We expect to continue to spend significant amounts of time and money on compliance with these rules. In addition, pursuant to the OTS Orders, we are required to prepare and submit various reports to our regulators. Compliance with various regulatory reporting obligations requires significant commitments of time from management and our directors, which reduces the time available for the performance of their other responsibilities. Our failure to track and comply with various applicable rules and reporting obligations may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, lead to additional regulatory enforcement actions, and could adversely affect the value of our securities.

The TARP Capital Purchase Program and the ARRA impose certain executive compensation and corporate governance requirements that may adversely affect us and our business, including our ability to recruit and retain qualified employees.

The purchase agreement we entered into in connection with our participation in the TARP Capital Purchase Program required us to adopt and comply with the Treasury’s standards for executive compensation and corporate governance while the Treasury holds equity issued by us pursuant to the TARP Capital Purchase Program, including any common stock issuable under the Warrant to purchase shares of our common stock issued to Treasury. These standards generally apply to our chief executive officer, chief financial officer and the three next most highly compensated senior executive officers. The standards include:

 

   

ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;

 

   

required clawbacks of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate;

 

   

prohibitions on making golden parachute payments to senior executives; and

 

   

an agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

In particular, the change to the deductibility limit on executive compensation may increase the overall cost of our compensation programs in future periods.

The American Recovery and Reinvestment Act of 2009 (“ARRA”) imposed further limitations on compensation while the Treasury holds equity issued by us pursuant to the TARP Capital Purchase Program, including:

 

   

a prohibition on making any golden parachute payments to a senior executive officer or any of our next five most highly compensated employees;

 

   

a prohibition on any compensation plan that would encourage manipulation of our reported earnings to enhance the compensation of any of our employees; and

 

   

a prohibition on the payment or accrual of any bonus, retention award, or incentive compensation to our five highest paid executives, except for long-term restricted stock with a value not greater than one-third of the total amount of annual compensation of the employee receiving the stock.

 

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The Treasury released an interim final rule on TARP standards for compensation and corporate governance on June 10, 2009, which became effective on June 15, 2009, which clarifies prohibitions on bonus payments, provides guidance on the use of restricted stock units, expands restrictions on golden parachute payments, mandates enforcement of clawback provision unless unreasonable to do so, outlines the steps compensation committees must take when evaluating risks posed by compensation arrangements, and requires the adoption and disclosure of a luxury expenditure policy, among other things. New requirements under the rules include enhanced disclosure of perquisites and the use of compensation consultants, and a prohibition on tax gross-up payments.

These provisions and any future rules issued by the Treasury could adversely affect our ability to attract and retain management capable of and motivated sufficiently to manage and operate our business through difficult economic and market conditions. For example, while we have an employment agreement with Mr. Cherven which provides for golden parachute payments and non-compete obligations, as long as we have not repaid the funds we received in connection with the TARP Capital Purchase Program, under the Interim Financial Rule, we are prohibited from making such a golden parachute payment to Mr. Cherven or any of the next five most highly compensated employees. It is not clear whether the non-compete provisions of the employment agreement are operable because of the restriction on the golden parachute payments. As a result, Mr. Cherven could work for another financial institution that did not receive TARP Capital Purchase Program funds and not be subject to similar compensation restrictions and could work for any financial institution and potentially not be subject to any restrictions pursuant to his employment agreement with us. If we are unable to attract and retain qualified employees to manage and operate our business, we may not be able to successfully execute our business strategy.

TARP lending goals may not be attainable.

Congress and the bank regulators have encouraged recipients of TARP capital to use such capital to make loans and it may not be possible to safely, soundly and profitably make sufficient loans to creditworthy persons in the current economy to satisfy such goals. Congressional demands for additional lending by TARP capital recipients, and regulatory demands for demonstrating and reporting such lending are increasing. On November 12, 2008, the bank regulatory agencies issued a statement encouraging banks to, among other things, “lend prudently and responsibly to creditworthy borrowers” and to “work with borrowers to preserve homeownership and avoid preventable foreclosures.” We continue to lend and have expanded our mortgage loan originations, and are reporting our lending to the Treasury. The future demands for additional lending are unclear and uncertain, and we could be forced to make loans that involve risks or terms that we would not otherwise find acceptable or in our shareholders’ best interest. Such loans could adversely affect our results of operations and financial condition, and may be in conflict with bank regulations and requirements as to liquidity and capital. The profitability of funding such loans using deposits may be adversely affected by increased FDIC insurance premiums.

Rules and policies applicable to TARP recipients could adversely affect our operations, financial condition, and results of operations. We may not be able to redeem the Series A Preferred Stock.

On December 23, 2008, pursuant to the Securities Purchase Agreement (the “Purchase Agreement”), First Community issued to Treasury for aggregate consideration of $10,685,000: (i) 10,685 shares of Series A Preferred Stock, par value $0.01 per share and liquidation preference $1,000 per share; and (ii) a warrant to purchase 228,312 shares of First Community’s common stock, par value $0.05 per share. Pursuant to the terms of the Purchase Agreement, our ability to declare or pay dividends on any of our shares is limited. Specifically, we are unable to declare dividend payments on common, junior preferred or pari passu preferred shares if we are in arrears on the dividends on the Series A Preferred Stock. In addition, our ability to repurchase our shares is restricted. Treasury consent generally is required for us to make any stock repurchase until the third anniversary of the investment by Treasury unless all of the Series A Preferred Stock has been redeemed or transferred. Further, common, junior preferred or pari passu preferred shares may not be repurchased if we are in arrears on the Series A Preferred Stock or Series B Preferred Stock dividends.

The rules and policies applicable to recipients of capital under the TARP Capital Purchase Program continue to evolve and their scope, timing and effect cannot be predicted. In addition, First Community’s OTS Orders required us to prepare a written plan detailing our obligations associated with our participation in TARP Capital Purchase Program and we are required to show how we will comply with reporting obligations under the TARP, including an assessment of a potential exit plan from TARP. We are also required to demonstrate that sufficient funds are maintained to service the dividend obligations of the Series A Preferred Stock.

Competition from financial institutions and other financial service providers may adversely affect our profitability.

The banking industry is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere.

We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market. Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance this strategy will be successful.

 

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The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions, including, without limitation, the FHLB and our correspondent banks. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, may lead to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions.

Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements.

The financial services industry is undergoing rapid technological changes, and new technology-driven products and services are frequently being introduced. In addition to serving clients better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs. Our future success will depend, in part, upon our ability to use technology to provide products and services that provide convenience to customers and create additional efficiencies in operations. We may need to make significant additional capital investments in technology in the future, and we may not be able to effectively implement new technology-driven products and services. Many competitors have substantially greater resources to invest in technological improvements.

Adverse events and severe weather conditions could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

The Florida economy relies heavily on tourism and seasonal residents. An act of war and acts of terrorism or other conflicts involving national security could affect general economic conditions in Florida, which would also negatively affect the businesses and customers in our markets which rely on tourism and seasonal residents. Our market areas are also susceptible to hurricanes and tropical storms and related flooding and wind damage. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where we operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes will affect our operations or the economies in our current market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of future hurricanes or tropical storms, including flooding and wind damage. Many of our customers have incurred significantly higher property and casualty insurance premiums on their properties located in our markets, which may adversely affect real estate sales and values in our markets.

The Series A Preferred Stock and the Series B Preferred Stock, and other potential issuances of equity securities, may impact net income available to holders of our common stock and our earnings per share.

The dividends declared on the Series A Preferred Stock and the Series B Preferred Stock will reduce the net income available to common shareholders and our earnings per share of common stock. The Series A Preferred Stock and Series B Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of our business. In addition, we may issue additional shares of preferred stock or common stock in the future (including shares of common stock issuable upon conversion of the Series B Preferred Stock), and such future issuances of equity could further reduce the earnings per share available to our existing shareholders.

Our earnings per share could also be diluted by the shares of common stock issuable upon exercise of the Warrant currently held by the Treasury and by the conversion of the Series B Preferred Stock. As of December 31, 2010, the shares issuable upon exercise of the Warrant represented approximately 4.2% of our outstanding common stock.

Holders of the Series A Preferred Stock and Series B Preferred Stock have certain voting and other rights that may adversely affect holders of our common stock, and the holders of shares of our Series A Preferred Stock may have different interests from, and vote their shares in a manner deemed adverse to, holders of our common and Series B Preferred Stock.

In the event that we fail to pay dividends on the Series A Preferred Stock for an aggregate of at least six quarterly dividend periods (whether or not consecutive) the Treasury will have the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid; otherwise, except as required by law, holders of the Series A Preferred Stock have limited voting rights.

 

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Risks Related to Our Growth Strategy

Our growth strategy may not be feasible or successful.

Our strategy through 2008 was to increase the size of our franchise through rapid growth and by aggressively pursuing business development opportunities. We are currently subject to OTS Orders which do not allow First Community Bank to increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the prior quarter without the prior written notice of non-objection by the OTS.

In the current economic and regulatory environment, First Community Bank’s management is employing several strategies that are designed to reduce the Bank’s assets and liabilities. First Community Bank is letting existing brokered deposits roll-off at maturity and has significantly reduced pricing on higher cost deposits. First Community Bank has for some time employed a strategy that increases low cost relationship driven core deposits, which is significantly improving deposit mix and will help the earnings potential going forward. On the asset side, the Bank is exploring a number of strategies to reduce classified assets through loan sales and aggressively marketing ORE properties. This strategy and other strategies are being employed to improve the over-all risk weighting of the loan and security portfolios.

However, when we are no longer subject to regulatory restrictions on growth, prudent opportunities again present themselves, the economy recovers in our market areas, and our capital position permits, we intend to resume this strategy of growth in strategic markets. We can provide no assurance when we will be able to resume this strategy or that we will be successful in increasing the volume of loans and deposits at acceptable risk levels and upon acceptable terms and expanding our asset base while managing the costs and implementation risks associated with this growth strategy. There can be no assurance that any further expansion will be feasible, profitable or that we will continue to be able to sustain our historical rate of growth, either through internal growth or through other successful expansions of our banking markets, or that we will be able to maintain capital sufficient to support our continued growth.

Future acquisitions and expansion activities may disrupt our business, dilute existing shareholders and adversely affect our operating results.

We regularly evaluate potential acquisitions and expansion opportunities. To the extent that we are permitted and are able to grow through acquisitions, there can be no assurance that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches or businesses, as well as other geographic and product expansion activities, involves various risks including: risks of unknown or contingent liabilities; unanticipated costs and delays; risks that acquired new businesses do not perform consistent with our growth and profitability expectations; risks of entering new markets or product areas where we have limited experience; risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures; exposure to potential asset quality issues with acquired institutions; difficulties, expenses and delays of integrating the operations and personnel of acquired financial institutions, and start-up delays and costs of other expansion activities; potential disruptions to our business; possible loss of key employees and customers of acquired institutions; potential short-term decreases in profitability; and diversion of our management’s time and attention from our existing operations and business.

Our past growth may not be indicative of our future growth.

We may not be able to resume our historical rate of growth or may not be able to grow our business at all. In addition, our prior growth may distort some of our historical financial ratios and statistics. Various factors, such as economic conditions, regulatory and legislative limitations and competition, may also impede or prohibit our ability to expand our market presence.

Other Risks

Control by Principal Shareholder

As of March 15, 2011, Robert M. Menke, our Chairman of the Board, beneficially owned approximately 44.4% of our outstanding shares of common stock, and held convertible preferred stock that could be converted into additional shares of common stock that would give him beneficial ownership of approximately 58.9% of our common stock. As a result, Mr. Menke will be able to either control, or exert substantial influence over, the election of our directors and any other matter submitted for shareholder approval.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

We lease our corporate headquarters, which also serves as our mid-county office in Pinellas County. Our headquarters is located at 9001 Belcher Road, Pinellas Park, Florida 33782.

 

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In addition to our headquarters, we currently have ten branch offices: St. Petersburg, Largo, West Central, South Shore, West Shore, Dade City, Zephyrhills, Port Charlotte, Punta Gorda, and Veterans. We own our West Central, West Shore, Port Charlotte, Punta Gorda, Veterans, and Zephyrhills offices. We lease the St. Petersburg, Largo, South Shore, and Dade City offices.

We operate an operations center in Largo, Florida, which is leased.

 

Item 3. Legal Proceedings.

From time to time, we are party to lawsuits and claims arising out of the normal course of business. In management’s opinion, there are no pending material legal proceedings to which we are a party or to which any of our properties are subject.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

On September 4, 2003, our stock began trading on the NASDAQ SmallCap Market (currently the NASDAQ Capital Market) under the symbol “FCFL.” As of March 1, 2011, there were 171 registered holders of common stock of First Community and approximately 523 beneficial holders. On March 15, 2005, we paid a stock dividend in common stock equal to 5% of the outstanding shares to shareholders of record as of the close of business on March 1, 2005. On January 20, 2006, a three-for-two stock split was issued to shareholders of record as of the close of business on January 10, 2006. On February 28, 2007 we paid a common stock dividend equal to 5% of our common shares outstanding to record holders as of the close of business on February 12, 2007. We did not repurchase any of our equity securities during the fourth quarter of 2009.

On March 1, 2011, the closing sales price of our common stock was $0.33 compared to $1.22 at December 31, 2010.

 

     Calendar Years  
     2010      2009  
     Low      High      Low      High  
     (Per Share)      (Per Share)  

First Quarter*

   $ 2.12       $ 4.99       $ 3.00       $ 7.50   

Second Quarter*

     1.85         3.25         3.70         6.96   

Third Quarter*

     1.10         2.39         3.30         4.29   

Fourth Quarter*

     1.13         3.00         1.75         4.02   

 

* Reflects the 5% stock dividends paid on March 15, 2005 and February 28, 2007 and three-for-stock split issued on January 20, 2006.

Equity Compensation Plan Information

 

Plan Category

   Number of Securities to be
Issued Upon Exercise of
Outstanding Options
     Weighted-Average
Exercise Price of
Outstanding Options (1)
     Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans (2)
 

Equity compensation plans approved by security holders

     172,157       $ 8.31         154,295   

Equity compensation plans not approved by security holders

        
                          

Total

     172,157       $ 8.31         154,295   
                          

 

(1)

Reflects the 5% stock dividends paid on March 15, 2005 and February 28, 2007, and the three-for-two stock split issued on January 20, 2006.

(2)

Excludes securities reflected in first column.

Stock Performance Graph

The following graph compares the cumulative stockholder’s return on First Community’s common stock with: (i) SNL Financial LLC’s index for southeastern banks and bank holding companies; and (ii) the Russell 3000 Index, which pertains to listed companies representing 98% of the U.S. market for the period from December 31, 2005 to December 31, 2010, inclusive.

 

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First Community Bank Corporation of America

LOGO

 

     12/31/05      12/31/06      12/31/07      12/31/08      12/31/09      12/31/10  

First Community Bank Corporation of America

     100.00         105.59         64.56         27.88         14.12         7.16   

Russell 3000

     100.00         115.71         121.66         76.27         97.89         114.46   

SNL Southeast Bank

     100.00         117.26         88.33         35.76         35.90         34.86   

 

Item 6. Selected Financial Data.

The following selected consolidated financial data, is derived from our financial statements and other data. The selected consolidated financial data should be read in conjunction with our financial statements, including the financial statement notes included elsewhere herein. Net loans are stated net of unearned income. Earnings per share is computed using the weighted-average number of shares of common stock and dilutive common stock equivalents from stock options as required. Book value per share excludes the effect of any outstanding stock options.

 

     At or for the year ended December 31,  
     2010     2009     2008  
     (Dollars in thousands, except per share data)  

Total assets

   $ 470,687      $ 547,918      $ 501,645   

Cash and cash equivalents

     48,315        50,697        32,458   

Securities available for sale

     45,761        50,850        25,227   

Securities held to maturity

     —          7,583        8,296   

Loans, net

     332,779        399,265        403,855   

Deposit accounts

     374,654        458,517        402,871   

Stockholders’ equity

     28,758        45,501        44,474   

Selected Operating Data:

      

Total interest income

   $ 22,120      $ 25,727      $ 27,153   

Total interest expense

     7,940        11,384        12,633   

Net interest income

     14,180        14,343        14,520   

Provision for loan losses

     16,599        11,125        9,237   

Net interest (loss) income after provision for loan losses

     (2,419     3,218        5,283   

Non-interest income

     2,343        2,076        1,898   

Non-interest expenses

     13,724        13,418        13,211   

Net (loss) earnings

     (19,028     (4,910     (3,635

Per Share Data( (1):

      

Basic earnings per share

   $ (3.65   $ (1.31   $ (.88

Diluted earnings per share

   $ (3.65   $ (1.31     (.88

Book value per share

   $ 1.88      $ 6.10        8.61   

Performance Ratios:

      

Return on average assets (R.O.A.)

     (3.62 )%      (.90 )%      (.78 )% 

Return on average equity (R.O.E.)

     (92.20 )%      (14.70 )%      (9.74 )% 

Dividend payout ratio

     —          —          —     

Equity to Assets

     6.11     8.30     8.87

Interest-rate spread during the period

     2.81     2.62     3.15

Net interest margin

     2.94     2.85     3.42

Non-interest expense to average assets

     2.65     2.46     2.83

Other Ratios and Data:

      

Average equity to average assets

     7.43     8.08     8.03

Allowance for loan losses to total loans

     3.40     1.92     2.00

Net charge-offs to average loans

     3.36     2.75     1.39

Non-performing loans to total loans

     10.01     6.66     3.19

Allowance for loan losses to non-performing loans

     33.98     28.89     62.51

Non-performing loans and foreclosed real estate as a percentage of total assets

     9.74     5.47     2.93

Total number of full-service banking offices

     11        11        10   

 

(1)

All per share amounts have been adjusted to reflect the 5% stock dividends paid March 15, 2005 and February 28, 2007, and the three-for-two stock split issued on January 20, 2006.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

First Community Bank and First Community Lender Services, Inc. are wholly-owned subsidiaries. Our primary business activity is the operations of First Community Bank, a federally-chartered stock savings bank. First Community provides a variety of banking services to small and middle market businesses and individuals through its four banking offices located in Pinellas County, two banking offices located in Hillsborough County, two banking offices in Pasco County and three banking offices located in Charlotte County, Florida. First Community Lender Services, Inc. provides tax deferred 1031 exchange services for eligible transactions. The following is a description of the significant accounting policies that we follow in preparing and presenting our consolidated financial statements.

Critical Accounting Policies

We believe that the determination of the allowance for loan losses represents a critical accounting policy. The allowance for loan losses is maintained at a level management considers adequate to absorb loan losses inherent in the portfolio, based on evaluations of the collectability and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on our review of the historical loan loss experience and such factors which, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. The allowance is based on ongoing assessments of the estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriate allowance level consists of several key elements described below.

Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on our estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flows and available legal options. Included in the review of individual loans are those that are impaired as provided in ASC 310. Any specific reserves for impaired loans are measured based on the fair value of the underlying collateral. The collectability of both principal and interest is evaluated when assessing the need for a specific reserve. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

Homogenous loans, such as installment and residential mortgage loans, are not individually reviewed by management. Reserves are established for each pool of loans based on the expected net charge-offs. Loss rates are based on the average net charge-off history by loan category.

Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the local economy, trends in the nature and volume of loans (delinquencies, charge-offs, non-accrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and our internal credit review function.

Specific reserves on individual loans and historical loss rates are reviewed throughout the year and adjusted as necessary based on changing borrower and collateral conditions and actual collection and charge-off experience.

 

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In June 2009, the FASB issued ASC 105 (“ASC 105”) “Generally Accepted Accounting Principles. ASC 105 states that the FASB Accounting Standards Codification (“Codification”) will become the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB. The Codification and all of its contents, which changes the referencing of financial standards, will carry the same level of authority. In other words, the GAAP hierarchy will be modified to include only two levels of GAAP, authoritative and nonauthoritative. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, and was adopted July 1, 2009. Therefore, all references to GAAP use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing GAAP, it did not have an impact on our financial condition, results of operations and cash flows.

Loans

A majority of First Community Bank’s loan activity is with borrowers located in our four markets, St. Petersburg/Clearwater, Tampa, Dade City/Zephyrhills, and Port Charlotte/Punta Gorda. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy and real estate markets in those counties. The customer base is comprised of individuals, professionals and small to middle market sized companies. Loans are underwritten primarily on the borrower’s ability to repay the loan through personal cash flow, cash flow generated from the business, income producing real estate or the specific sale of an asset. Collateral and the amount to be obtained are determined through an analysis of the specific transaction and the source of repayment and related risk assessment. Collateral types are accounts receivable, inventory, equipment, and commercial and residential real estate. The real estate utilized in commercial transactions is predominantly owner occupied industrial or income producing properties such as apartments, office, warehouse and some retail. The Bank’s exposure in commercial real estate is over 58% owner occupied and the source of repayment is cash flow from the borrowers’ operations. The remaining 41% of commercial real estate is income producing properties dependent on tenants. The Bank’s residential mortgage loans are comprised of 1-4 family homes and condominiums, 77% of which are primary residences and 23% are for investment.

We believe that general economic conditions in our primary service areas, including the real estate market, continues to be weak due to the decrease in demand for real estate property and personal services. Accordingly, we have experienced decreased demand for consumer and commercial loans in 2010 as net loans decreased $66.5 million, or (16.65) %, to $332.8 million at December 31, 2010. Commercial loan activity is focused on seasonal working capital loans and commercial real estate term loans. At December 31, 2010, 2009, and 2008, our non accrual loans had balances of $34,478,000, $27,104,000, and $13,165,000, respectively.

Through First Community Bank, we engage in a full complement of lending activities, including commercial, consumer/installment and real estate loans. We do not participate in high risk lending activities such as sub-prime, Alt-A or negative amortization loans.

Commercial lending activities are directed principally towards businesses whose demands for funds fall within our bank subsidiary’s legal lending limits and who are potential deposit customers. Particular emphasis is placed on loans to small- and medium-sized businesses. Commercial loans consist primarily of loans made to individual, partnership or corporate borrowers, and who obtained those loans for a variety of business purposes.

Real estate loans consist of residential and commercial first mortgage loans, second mortgage financing and construction loans.

Lines of credit include home equity, commercial, and consumer lines of credit.

Consumer loans consist primarily of installment loans to individuals for personal, family and household purposes.

We have correspondent relationships with several banks, whereby we can engage in the sale and purchase of loan participations. Participations purchased, if any, are entered into using the same underwriting criteria that would be applied if we had originated the loan. This includes credit and collateral analysis and maintenance of a complete credit file on each purchased participation loan that is consistent with the credit files that we maintain on our customers.

 

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The following table presents various categories of loans contained in our loan portfolio and the total amount of all loans at December 31 for the years indicated:

 

     December 31,  

Type of Loan

   Amount
2010
    Percent of
Loans in
Each
Category
to Total
Loans
2010
    Amount
2009
    Percent of
Loans in
Each
Category
to Total
Loans
2009
    Amount
2008
    Percent of
Loans in
Each
Category
to Total
Loans
2008
    Amount
2007
    Percent of
Loans in
Each
Category
to Total
Loans
2007
    Amount
2006
    Percent of
Loans in
Each
Category
to Total
Loans
2006
 
     (Dollars in thousands)  

Residential mortgage loans

   $ 93,946        27.2   $ 113,554        27.8   $ 121,427        29.4   $ 128,426        33.1   $ 114,311        32.6

Commercial real estate loans

     161,580        46.8        198,799        48.6        197,716        47.8        180,304        46.5        162,973        46.5   

Commercial loans

     17,706        5.1        19,936        4.9        22,829        5.5        22,343        5.8        21,572        6.1   

Installment loans

     71,846        20.9        75,852        18.7        71,202        17.3        56,496        14.6        51,784        14.8   
                                                                                

Subtotal

     345,078        100.0     408,141        100.0     413,174        100.0     387,569        100.0   $ 350,640        100.0
                                                  

Deduct:

                    

Allowance for loan losses

     (11,717       (7,830       (8,230       (4,479       (3,499  

Net deferred loan fees

     (582       (1,046       (1,089       (539       (353  
                                                  

Net loans

   $ 332,779        $ 399,265        $ 403,855        $ 382,551        $ 346,788     
                                                  

The following is an analysis of maturities of our loans as of December 31, 2010 (in thousands):

 

Type of Loan

   Due in 1
Year or
Less
     Due in 1 to  5
Years
     Due After  5
Years
     Total  

Residential mortgage loans

     7,679         14,345         71,922         93,946   

Commercial real estate loans

     38,517         74,244         48,819         161,580   

Commercial loans

     8,661         8,551         494         17,706   

Installment loans

     13,598         16,277         41,971         71,846   
                                   

Total

   $ 68,455       $ 113,417       $ 163,206       $ 345,078   
                                   

All loans are recorded according to original terms and demand loans, overdrafts and loans having no stated repayment terms or maturity are reported as due in one year or less.

At December 31, 2010 the amount of loans due after one year with fixed interest rates totaled approximately $111.8 million, while the amount of loans due after one year with floating interest rates totaled approximately $165.1 million.

Nonperforming Loans and Real Estate Owned Policy. When a borrower fails to make a required payment on a loan, our loan officers attempt to collect the payment by contacting the borrower. If a payment on a loan has not been received by the end of a grace period (usually 10 days from the payment due date), notices are sent at that time, with follow-up contacts made thereafter. In most cases, delinquencies are cured promptly. If the delinquency exceeds 29 days and is not cured through normal collection procedures, more formal measures are instituted to remedy the default, including the commencement of foreclosure proceedings. We will then attempt to negotiate with the delinquent borrower to establish a satisfactory payment schedule.

The following summarizes the 30+ days delinquency by loan category for the dates indicated:

 

     December 31  
     2010     2009  

Residential mortgage loans

   $ 13,118         3.79   $ 12,138         2.97

Commercial real estate loans

     16,351         4.73        17,158         4.20   

Land and lot loans

     8,438         2.44        7,989         1.96   

Commercial loans

     2,466         0.71        740         0.18   

Installment loans

     659         0.19        555         0.14   
                      

Total

   $ 41,032         $ 38,580      
                      

A loan is generally placed on non-accrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory. All loans past due 90 days, however, are placed on non-accrual status and all prior accrued interest is reversed against income. Cash payments received while a loan is in non-accrual status are recorded as a reduction of principal as long as doubt exists as to collection. If a loan is brought current it will be taken off non-accrual status.

If foreclosure is required, when completed, the property would be sold at a public auction in which we will generally participate as a bidder. If we are the successful bidder, the acquired real estate property is then included in the foreclosed real estate account until it is sold. Under federal regulations we are permitted to finance sales of foreclosed real estate by “loans to facilitate,” which may involve more favorable interest rates and terms than generally would be granted under normal underwriting guidelines.

 

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At December 31, 2010, 2009, 2008, 2007, and 2006, non-accrual loans were as follows (dollars in thousands):

 

     At December 31,  
     2010      2009      2008      2007      2006  

Residential mortgage loans

   $ 9,919       $ 8,863       $ 3,216       $ 1,042       $ —     

Commercial real estate loans

     21,861         17,509         9,736         1,289         150  

Commercial loans

     2,479         623         74         —           —     

Installment loans

     219         109         139         33        —     
                                            

Total non-accrual loans

   $ 34,478       $ 27,104       $ 13,165       $ 2,364       $ 150  
                                            

The Bank’s non-accrual loans and foreclosed real estate (“REO”) is comprised of the following:

 

     December 31, 2010      December 31, 2009  
     Non-accrual      REO      Non-accrual      REO  
     $      #      $      #      $      #      $      #  

Residential mortgage loans

     9,919         44         3,793         24         8,863         35         1,434         8   

Commercial real estate loans

     15,218         29         5,140         13         12,610         18         447         2   

Land and lot loans

     6,643         26         2,282         23         4,899         29         931         11   

Commercial loans

     2,479         9         —           —           623         5         —           —     

Installment loans

     219         4         170         4         109         3         80         2   
                                                                       

Total

   $ 34,478         112       $ 11,385         64       $ 27,104         90       $ 2,892         23   
                                                                       

A loan is classified impaired when, based on current information and events, it is probable that First Community Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and contractual principal payments will be collected as scheduled in the loan agreement. The Bank obtains external appraisals on commercial real estate loans considered collateral dependent and on commercial REO on an annual basis. Once the appraisal is obtained First Community Bank will evaluate and, if required, will write down the loan. The Bank obtains a broker’s price opinion or other valuation service estimate every six months on any impaired collateral dependent single family or residential lot loans and REO, and a write down is made as required. A formal appraisal is ordered to evaluate the fair value when the foreclosure process is completed and the property title is being transferred to the bank as REO. The REO is initially valued at the appraised value less estimated costs to sell.

The following table shows the allocation of loan loss reserve between nonimpaired loans and impaired loans. It further illustrates the valuation of impaired loans relative to book value.

 

     December 31, 2010  
     Nonimpaired
Loans
    Impaired
Loans
    Total  

Allowance for loan losses:

      

Beginning balance

   $ 7,283        547        7,830   

Provision

     8,055        8,544        16,599   

Charge-offs

     (7,996     (4,983     (12,979

Recoveries

     267        0        267   
                        

Ending balance

   $ 7,609        4,108        11,717   
                        

Loss allowance

   $ 7,609        4,108        11,717   

Partial charge-offs of loans currently in portfolio

     0        7,004        7,004   
                        

Total

   $ 7,609        11,112        18,721   
                        

Total loans

   $ 292,110      $ 52,968        345,078   
                        

Allowance loss and charge-offs as a percentage of total loans

     2.60     20.98     5.43

Impaired loans with partial charge-offs:

      

Fair value of collateral

     $ 35,465     

Estimated selling costs

       (4,755  
            

Fair value less selling costs

     $ 30,710     
            

Gross impaired loans prior to charge-offs

     $ 41,822     

Partial charge-offs of impaired loans

       (7,004  
            

Loss Allowance

       (4,108  

Book value of impaired loans with partial charge-offs

     $ 30,710     
            

Fair value less selling costs in excess of book value

     $ —       
            

Impaired loans without partial charge-offs:

      

Fair value of collateral

     $ 32,010     

Estimated selling costs

       (3,201  
            

Fair value less selling costs

     $ 28,809     
            

Impaired loans

     $ 18,149     

Loss allowance

       —       
            

Book value of impaired loans

     $ 18,149     
            

Fair value less selling costs in excess of book value

     $ 10,660     
            

 

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Predominantly, nonperforming assets are vacant residential lots, single family homes, multifamily and small office properties and are the primary reason for the build up in impaired loans. The subsequent move to charge-off status is rapid and is not reflected as a specific reserve. The Bank recognizes these losses as they become apparent.

Charge-Off Policy. All loans deemed uncollectible by management are charged-off or written down according to guidelines established and approved by the Board, which are in accordance with the reserve methodology and regulatory and accounting guidelines. Approval of First Community Bank’s chief executive officer or senior credit officer is required for all charge-off requests, which are reported to the Board at its next scheduled meeting. The chief executive officer and senior credit officer are the only authorities who can approve the delay of a charge-off outside of specific time frames for extenuating circumstances.

 

   

All open-end credits past due for more than 180 days and all unsecured closed-end credits past due for 120 days must be charged-off.

 

   

Secured non real estate loans when deemed uncollectible by management will be charged-off or written down to no more than 100% of the net liquidated collateral value of the loan as determined by management.

 

   

Unsecured loans past due 90 to 120 days or more will be charged-off in full or written down to an amount deemed collectible by management.

 

   

Management has the authority to charge-off loan losses and/or overdrafts up to $25,000, when deemed uncollectible.

At December 31, 2010, our loans that would be defined as troubled debt restructuring had a balance of $19,625,000. For the prior years ending December 31, 2009, 2008, 2007, and 2006, there was a balance of $19,972,000, $15,850,000, $0, and $0, respectively. At December 31, 2010, 2009, 2008, 2007, and 2006, there were no loans which were past due ninety days or more and still accruing.

An analysis of our allowance for loan losses and loan loss experience (charge-offs and recoveries) is furnished in the following table (dollars in thousands):

 

     Year Ended December 31,  
     2010     2009     2008     2007     2006  

Balance at beginning of period

   $ 7,830      $ 8,230      $ 4,479      $ 3,499      $ 3,416   
                                        

Charge-offs:

          

Consumer

     (290     (188     (320     (85     (19

Commercial

     (146     (152     (515     (96     (134

Residential

     (12,543     (11,277     (4,734     (7     —     

Recoveries:

          

Consumer

     78        33        16        3        6   

Commercial

     —          23        —          —          —     

Residential

     189        36        67        —          —     
                                        

Net charge-offs

     (12,712     (11,525     (5,486     (185     (147

Provision for losses charged to operations

     16,599        11,125        9,237        1,165        230   
                                        

Balance at end of period

   $ 11,717      $ 7,830      $ 8,230      $ 4,479      $ 3,499   
                                        

Asset Quality Ratios

          

Net charge-offs to average loans

     3.36     2.75     1.39     .03     .05

Allowance for loan losses to total loans

     3.40 %     1.92 %     2.00 %     1.16 %     1.00 %

Allowance for loan losses to non performing loans

     33.98 %     28.89 %     62.51 %     1.89 %     23.38 %

Non performing loans to total loans

     10.01 %     6.66 %     3.19 %     .61 %     .04 %

Non performing loans to total assets

     7.33 %     4.95 %     2.62 %     .54 %     .04 %

 

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At December 31, 2010, 2009, 2008, 2007, and 2006, the allowance for possible credit losses was allocated as follows (dollars in thousands):

 

     2010     2009     2008     2007     2006  
     Amount      Percent of
Loans in
Each
Category
to Total
Loans
    Amount      Percent of
Loans in
Each
Category
to Total
Loans
    Amount      Percent of
Loans in
Each
Category
to Total
Loans
    Amount      Percent of
Loans in
Each
Category
to Total
Loans
    Amount      Percent of
Loans in
Each
Category
to Total
Loans
 

Residential mortgage loans

   $ 4,166         27.2   $ 1,991         27.8   $ 2,812         29.4   $ 901         33.1   $ 317         32.6

Commercial real estate loans

     5,939         46.8        4,208         48.6        3,392         47.8        2,094         46.5      $ 1,400         46.5   

Commercial loans

     211         5.1        249         4.9        416         5.5        244         5.8        945         6.1   

Installment loans

     1,401         20.9        1,382         18.7        1,610         17.3        1,240         14.6        837         14.8   
                                                                                     

Total

   $ 11,717         100.0   $ 7,830         100.0   $ 8,230         100.0   $ 4,479         100.0   $ 3,499         100.0
                                                                                     

Although the allowance for loan losses was determined by category of loans, the entire allowance is available to absorb losses from any category.

The allowance for loan losses is established based upon management’s evaluation of the potential losses in our total loan portfolio. In analyzing the adequacy of the allowance for loan losses, management considers its own internal review, as well as the results of independent external credit reviews, changes in the composition and volume of the loan portfolio, levels of non-performing and charged-off loans, local and national economic conditions, and other factors.

Local Economic Conditions. The Bank operates in two distinct geographic markets on the West Coast of Florida: the Tampa Bay region in west-central Florida and the Port Charlotte Region in southwest Florida. Three of First Community Bank’s markets are located around Tampa Bay (Pinellas County, Pasco County and Hillsborough County). The fourth market is located in Charlotte County. The economy in Florida has been hard hit by the decline in real estate values resulting from an over supply of residential housing units, a significant reduction in development activity and reductions in sales activity. The lack of absorption of vacant land, lots and certain single family and condominium products has continued to feed the decline in values. The Tampa Bay region is more diversified with other service and manufacturing industry than the Port Charlotte region, which had been primarily dependent on residential real estate development and retirees. Although the Tampa market has shown decreased values in single family homes and condominiums, it has not suffered as severely as the Port Charlotte market, where housing values have dropped approximately 40-50% from the height of activity in 2005-2006. Similarly vacant land and lot values have fallen 60-70%. The drop in values continues to contribute to the delinquency or default of borrowers in that market. The Tampa market has seen a drop in values for single family of 35-45%, however condominiums and luxury homes have experienced larger decreases. Land and lot values have diminished by 30-40%. The Bank has experienced continued losses in vacant residential lot loans and single family homes. A predominant portion of these losses are in the Port Charlotte market. Unemployment in Port Charlotte is purported to be 15%, thus many borrowers struggle to maintain a positive payment history.

The commercial real estate market in the Tampa Bay market is showing signs of weakness especially in the multifamily, office rental and retail rental markets. The Bank does not have a large concentration in these areas, however, it is experiencing increased delinquency trends in that market. Commercial real estate in Port Charlotte is also experiencing significant weakness, however, First Community Bank has minimal loans of that type in that market.

In light of these real estate trends First Community Bank has experienced an increase in its problem assets specifically in vacant residential lots and single family residential which has comprised 72% of charge-off activity. Commercial real estate related charge-offs to date are 23% of total charge-offs. The remaining charge-offs have been consumer loans.

The increase in nonperforming assets correlates with the real estate related delinquencies being experienced by First Community Bank in the Port Charlotte and Tampa Bay markets. Predominantly, the nonperforming assets are vacant residential lots, single family homes, multifamily and small office properties.

The Bank initially will try and work with each borrower with an impaired loan. Should negotiations fail, then legal action is initiated. The foreclosure process in Florida has continued to lengthen given the large number of cases in process. This delay has inhibited First Community Bank’s ability to obtain possession of real estate in a timely manner. The average is now between twelve and eighteen months. The Bank currently has two special assets officers, one devoted to retail and one to commercial. In addition, we have a person who assists in handling other real estate owned by First Community Bank.

 

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The Bank has no major concentration in acquisition and development or builder lines. The Bank currently has one acquisition and development loan with seventeen lots totaling $0.5 million, and two primary builder relationships totaling $1.6 million. The builders are located in the St. Petersburg/Clearwater area and the inventory is thirty-two speculative lots and three speculative townhomes, and the source of repayment is sale of the assets. The Bank’s raw land (commercial and residential) and developed commercial land loans totals $18.8 million to fifty-two borrowers, a majority of which was underwritten based on the cash flow of the borrower or guarantors supporting the loan. The Bank has $9.8 million of loans on developed residential lots to 74 borrowers, mostly underwritten with the borrower’s personal cash flow as the primary source of repayment. Within this number are several small builders who maintain minimal lot inventory. The Bank has minimal exposure in speculative single family homes, as most loans are underwritten based on the borrower’s ability repay the loan from cash flow in the event it must be refinanced on a permanent basis.

The Bank also has over $26 million in manufactured housing loans in numerous parks throughout the four market areas, including rental parks, cooperative owned parks and subdivision parks. The Bank perfects its interest in the title and the cooperative share or real estate, as applicable.

Investment Securities. We primarily invest in obligations of the United States or obligations guaranteed as to principal and interest by the United States and other taxable securities or mortgage backed obligations. The following table presents, at December 31, 2010, 2009 and 2008 the carrying value of our investments:

 

     December 31,  

Investment Category

   2010      2009      2008  
     (dollars in thousands)  

Available for sale:

        

U.S. Government agency securities

   $ 7,457         17,212         2,546   

Mortgage-backed securities

     38,304         26,936         22,681   

Municipal securities

     —           6,702         —     
                          

Total

   $ 45,761       $ 50,850       $ 25,227   
                          

Held to maturity:

        

U.S. Government agency securities

   $ —         $ —         $ 500   

Mortgage-backed securities

     —           568         779   

Municipal securities

     —           7,015         7,017   
                          

Total

   $ —         $ 7,583       $ 8,296   
                          

The following table sets forth, by maturity distribution, certain information pertaining to the securities portfolio (dollars in thousands):

 

     One Year or Less     After One Year to
Five Years
    After Five Years to
Ten Years
    After Ten Years     Total  
     Carrying
Value
     Average
Yield
    Carrying
Value
     Average
Yield
    Carrying
Value
     Average
Yield
    Carrying
Value
     Average
Yield
    Carrying
Value
     Average
Yield
 

Available for Sale:

                         

U.S. Government agency and municipal securities

   $ —           0   $ —           0     —           0     7,457         3.33     7,457         3.33
                                                                         

Total

   $ —           0   $ —           0   $ —           0   $ 7,457         3.33     
                                                                         

Mortgage-backed securities

                         38,304         4.17
                                     

Total

                       $ 45,761         4.03
                                     

Liquidity and Capital Resources

Liquidity Management. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while attempting to maximize 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 the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable 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 our primary markets. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit including federal funds purchased from correspondent banks and from the FHLB.

 

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Index to Financial Statements

Since late 2007, and particularly during the second half of 2008 and through 2009, the financial services industry and the credit markets generally have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a lack of liquidity. The liquidity issues have been particularly acute for regional and community banks, as many larger correspondent lenders have significantly curtailed their lending to regional and community banks due to the increased levels of losses that they have suffered on such loans. In addition, many of the larger correspondent lenders have reduced or even eliminated Federal Funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage.

Our liquidity, on a parent only basis, is adversely affected by our current inability to receive dividends from First Community Bank without prior regulatory approval.

On February 12, 2010, we concluded a public stock offering which brought in approximately $10.4 million in new capital. For the year ended December 31, 2010, we incurred net losses of $19.0 million, Our recent internal analysis of capital indicated potential additional provision for loan and lease losses of $7 million for 2011. Under the terms of the OTS Order, by June 30, 2011, First Community Bank shall have and maintain a Tier 1 (core) Capital Ratio equal to or greater than eight percent (8%) and a Total Risk-Based Capital Ratio equal to or greater than thirteen percent (13%). Based on our reviews and judgments, we believe that we will need a minimum of approximately $20 million of additional capital to meet our new capital requirements.

Our ability to achieve these goals depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market conditions, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, there can be no assurance that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to satisfy these capital ratios and other regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected. We may not have sufficient liquidity to continue to fund new loan originations, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature.

Deposits and Other Sources of Funds. In addition to deposits, the sources of funds available for lending and other business purposes include loan repayments, loan sales, borrowings from the FHLB and funds received from our participation in the Capital Purchase Program. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced significantly by general interest rates and money market conditions.

A full range of interest bearing and non-interest bearing accounts, are offered, including business and consumer checking accounts, negotiable order of withdrawal (“NOW”) accounts, money market accounts with limited transactions, individual retirement accounts, regular interest bearing statement savings accounts and certificates of deposit with a range of maturity date options. The sources of deposits are individuals, businesses and employees of businesses within our market areas. Deposits are generally obtained through the personal solicitation of our officers and directors, direct mail solicitation and advertisements published in the local media. We pay competitive interest rates on time and savings deposits. In addition, we have implemented a service charge fee schedule competitive with other financial institutions in our market areas, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and the like.

Deposits from our primary market provide a relatively stable funding source for our loan portfolio and other earning assets. Our total deposits were $375, $459, and $403 million at December 31, 2010, 2009, and 2008, respectively. Most of the $84 million decrease in deposits since December 31, 2009, was attributable to the roll off of brokered CDs. The funding requirements for loans have decreased in 2010, from 2009 levels. Net loans have decreased $66.5 million during the period from December 31, 2009, to December 31, 2010. Management anticipates that a stable base of deposits will be our primary source of funding to meet both our short-term and long-term liquidity needs in the future.

The following table presents, for the years ended December 31 2010, 2009, and 2008 the average amount of, and average rate paid on, each of the following deposit categories (dollars in thousands):

 

     Average Amount      Average Rate Paid  

Deposit Category

   2010      2009      2008      2010     2009     2008  

Non interest bearing demand

   $ 35,727       $ 36,512       $ 33,429         —       —       —  

Savings, NOW and money market deposits

     228,250         169,190         130,833         1.11        1.66        1.87   

Time deposits

     173,991         247,657         205,375         2.36        2.89        4.07   
                                 

Total

   $ 437,968       $ 453,359       $ 369,637         1.65     2.39     3.21
                                                   

 

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The following table indicates the amount of outstanding time certificates of deposit of $100,000 or more and their respective maturities as of December 31 (in thousands):

 

     2010  

3 months or less

   $ 20,144   

3-12 months

   $ 21,925   

1-3 years

   $ 37,856   

Over 3 years

   $ 2,986   
        

Total

   $ 82,911   
        

Borrowings. To date, we have relied on deposits, proceeds from sales of loans and securities, repurchase agreements, and borrowings from the Federal Home Loan Bank as our major sources of funding. As of December 31, 2010, we held repurchase agreements, which are used as sweep account for commercial customers, of approximately $1.8 million. We will continue to rely on loan repayments, loan sales, and the sale of investment securities as additional sources of funding. In addition, in the future if there are periods when the supply of funds from deposits or other sources cannot meet our demand for loans, we have the ability to seek a portion of the needed funds through loans (advances) from the FHLB where we currently has the ability to borrow up to $66 million. The amounts advanced under FHLB advances, the maturity date, and the weighted-average interest rate as of December 31, 2010, 2009 and 2008, are set forth in the table below ($ in thousands):

 

     Interest     At December 31,  

Maturing in Year Ending December 31,

   Rate     2010      2009      2008  

2009

     3.71        —           —           1,000   

2010

     3.75        —           5,000         5,000   

2011

     5.40        —           5,000         5,000   

2011

     0.38        7,500         —           —     

2012

     4.06        —           5,000         5,000   

2012

     0.50        3,000         —           —     

2012

     0.72        7,500         —           —     

2013

     2.30 (3)      —           —           1,000   

2013

     0.98        5,000         —           —     

2013

     1.19        5,000         —           —     

2013

     0.83        3,000         —           —     

2014

     2.98        5,000         —           —     

2014

     1.20        3,000         —           —     

2015

     2.76 (1)      5,000         5,000         5,000   

2015

     2.92 (1)      5,000         5,000         5,000   

2016

     4.62        5,000         5,000         5,000   

2017

     2.92 (2)      6,000         6,000         6,000   
                            
     $ 60,000       $ 36,000       $ 38,000   
                            

 

(1)

FHLB has a call option in February 2011

(2)

FHLB has a call option in March 2011 and quarterly thereafter

(3)

FHLB has a call option in March 2009 and quarterly thereafter

Participation in the Capital Purchase Program. In December 2008, we determined that it was in our best interest to participate in the CPP subdivision of TARP. Under the program, the Treasury can purchase shares of senior preferred stock (“Preferred Stock”) and a warrant to purchase common stock (“Warrant”) of financial institutions.

On December 18, 2008, we filed with the Division of Corporations, Secretary of State of Florida an amendment to our Articles of Incorporation establishing the terms of the preferred shares. Subsequently on December 23, 2008, pursuant to the CPP, we sold to the Treasury: (a) 10,685 shares of First Community Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), having a liquidation preference of $1,000 per share, and (b) a ten-year warrant (the “Warrant”) to purchase up to 228,312 shares of our common stock at an exercise price of $7.02 per share. The issuance and sale was exempt from registration as a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended. The purchase price for the Series A Preferred Stock and the Warrant was $10,685,000, or $1,000 per share of the Series A Preferred Stock.

Under the CPP Purchase Agreement, cumulative dividends on the Series A Preferred Stock will accrue on the purchase price at an annual rate of 5% per year for the first five years and at an annual rate of 9% thereafter, but will be paid only if and when declared by our Board of Directors. The Series A Preferred Stock have no maturity date and rank senior to the common stock (and pari passu with any other First Community senior preferred stock, of which no shares are currently outstanding) with respect to the payment of dividends, distributions and amounts payable upon the liquidation, dissolution and winding up of First Community. Subject to the approval of the Board of Governors of the Federal Reserve System, the Series A Preferred Stock is redeemable at our option at 100% of their liquidation preference, provided that we have consulted with the OTS regarding any repurchase. Although ARRA was not specific, we believe the Treasury will require the OTS’ consent as part of such consultation to redeem the Series A Preferred Stock.

 

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Index to Financial Statements

Contractual Obligations

Contractual obligations for payments under long-term debt and lease obligations are shown as follows, stratified by remaining term to contractual maturity (in thousands):

 

     Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
     Total  

Real estate operating leases

   $ 539       $ 919       $ 925       $ 157       $ 2,540   

Certificates of Deposit

     68,190         50,705         5,080         —         $ 123,975   

Federal home loan bank advances

     7,500         23,500         8,000         21,000       $ 60,000   
                                            

Total

   $ 76,229       $ 75,124       $ 14,005       $ 21,157       $ 186,515   
                                            

Further discussion of the nature of each obligation is included in “Note 5-Premises and Equipment, Net”, “Note 6-Deposits”, and “Note 7-Federal Home Loan Bank Advances”.

Average Balance, Interest and Average Yields and Costs

The following is an analysis of the net interest earnings for the years ended December 31, 2010, 2009, and 2008, with respect to each major category of interest-earning assets and each major category of interest-bearing liabilities.

For purposes of these analyses, non-accruing loans, if any, are included in the average balances.

 

    For the Year Ended December 31,  
    2010     2009     2008  
    Average
Balance
    Interest
and
Dividends
    Average
Yield/Rate
    Average
Balance
    Interest
and
Dividends
    Average
Yield/Rate
    Average
Balance
    Interest
and
Dividends
    Average
Yield/Rate
 
    (Dollars in thousands)  

ASSETS:

                 

Earning assets:

                 

Loans(1)

  $ 369,256        20,212        5.47   $ 410,944        23,492        5.72   $ 389,862        25,413        6.52

Securities(2)

    55,977        1,745        3.12     53,205        2,141        4.02     29,006        1,410        4.86

Other interest earnings assets

    56,308        163        0.29     39,928        94        0.24     5,692        330        5.80
                                                     

Total earning assets

    481,541        22,120        4.59     504,077        25,727        5.10     424,560        27,153        6.40
                                   

Non-earning assets

    43,580            41,549            42,933       
                                   

Total Assets

  $ 525,121          $ 545,626          $ 467,493       
                                   

LIABILITIES:

                 

Interest-bearing liabilities:

                 

Savings NOW and money market

  $ 228,250        2,523        1.11   $ 169,190        2,814        1.66   $ 130,833        2,449        1.87

Time Deposits

    173,991        4,101        2.36     247,657        7,156        2.89     205,375        8,349        4.07
                                                     

Total Interest Bearing Deposits

    402,241        6,624        1.65     416,847        9,970        2.39     336,208        10,798        3.21

Other borrowings(3)

    43,780        1,316        3.01     41,624        1,414        3.40     53,336        1,835        3.44
                                                     

Total interest-bearing liabilities

    446,021        7,940        1.78     458,471        11,384        2.48     389,544        12,633        3.24
                                   

Non interest-bearing liabilities

    40,097            43,095            40,395       

Stockholders’ equity

    39,003            44,060            37,554       
                                   

Total liabilities and equity

  $ 525,121          $ 545,626          $ 467,493       
                                   

Net interest income

    $ 14,180          $ 14,343          $ 14,520     
                                   

Interest-rate spread(4)

        2.81         2.62         3.15

Net interest margin(5)

        2.94         2.85         3.42

Ratio of average interest-earning assets to average interest-bearing liabilities

        1.08            1.10            1.09   
                                   

 

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Index to Financial Statements

 

(1)

Balances are net of deferred loan origination costs, undisbursed proceeds of construction loans in process, and include non-performing loans.

(2)

Yields on securities available for sale are based on average amortized cost.

(3)

Other borrowings include Federal Home Loan Bank Advances, repurchase agreements with customers and First Community’s line of credit.

(4)

Interest-rate spread represents the difference between the weighted-average yield on interest-earnings assets and the weighted-average cost of interest bearing liabilities.

(5)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

Rate/Volume Analysis

The following tables set forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to:

 

   

Changes in rate (change in rate multiplied by prior volume);

 

   

Changes in volume (change in volume multiplied by prior rate); and

 

   

Changes in rate-volume (change in rate multiplied by change in volume).

 

     Year Ended December 31, 2010
Compared to 2009
Increase (Decrease) Due to
(dollars in thousands)
 
     Rate     Volume     Rate/Volume     Total  

Interest Income:

        

Loans

   $ (1,027   $ (2,385 )   $ 132      $ (3,280

Securities

     (479     111        (28     (396

Other interest-earning assets

     20        39        10        69   
                                

Total (decrease) increase in interest income

   $ (1,486   $ (2,235   $ 114      $ (3,607
                                

Interest Expense:

        

Deposits:

        

Savings, NOW and money-market deposits

     (931     980        (340     (291

Time deposits

     (1,313     (2,129     387        (3,055

Other borrowings

     (162     73        (9     (98 )
                                

Total (decrease) increase in interest expense

     (2,406     (1,076     38        (3,444
                                

Net change in net interest income

   $ 920      $ (1,159   $ 76      $ (163
                                
     Year Ended December 31, 2009
Compared to 2008
Increase (Decrease) Due to
(dollars in thousands)
 
     Rate     Volume     Rate/Volume     Total  

Interest Income:

        

Loans

   $ (3,119   $ 1,375      $ (177   $ (1,921

Securities

     (244     1,176        (201     731   

Other interest-earning assets

     (316     1,986        (1,906     (236
                                

Total (decrease) increase in interest income

   $ (3,679   $ 4,537      $ (2,284   $ (1,426
                                

Interest Expense:

        

Deposits:

        

Savings, NOW and money-market deposits

     (275     717        (77     365   

Time deposits

     (2,423     1,721        (491     (1,193

Other borrowings

     (21     (403     3        (421
                                

Total (decrease) increase in interest expense

     (2,719     2,035        (565     (1,249
                                

Net change in net interest income

   $ (960   $ 2,502      $ (1,719   $ (177
                                

 

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Index to Financial Statements

Comparison of the Years Ended December 31, 2010 and 2009

General. We recorded a net loss for the year ended December 31, 2010 of $19.0 million compared to a net loss of $4.9 million for the year ended December 31, 2009. The increase in losses was due to increased credit losses.

We recorded a net loss available to common stockholders, after preferred stock dividends requirements and amortization of preferred discount, for the year ended December 31, 2010 of $19.8 million or $(3.65) per basic share and diluted share compared to a net loss of $5.5 million or $(1.31) per basic share and diluted share for the year ended December 31, 2009.

The $14.3 million increase in losses reflected a $5.5 million increase in provision for loan losses, which made the loan reserve balance $11.7 million, or 3.40% of gross loans. Net charge-offs were $12.7 million for the year ended December 31, 2010 compared to $11.5 million for the year ended December 31, 2009. An allowance was established against the deferred tax asset of $10.6 million as it became apparent that we would record our third consecutive annual loss.

Net Interest Income. Interest income decreased to $22.1 million for the year ended December 31, 2010, from $25.7 million for the year ended December 31, 2009. Interest on loans for the year ended December 31, 2010 decreased to $20.2 million from $23.5 million for the year ended December 31, 2009. The decrease in interest income on loans was attributable to a decline in the average yield earned on loans to 5.47% for the year ended December 31, 2010 from 5.72% for the year ended December 31, 2009. Interest on securities decreased to $1.7 million for the year ended December 31, 2010 from $2.1 million for the year ended December 31, 2009. The decrease in interest income on securities was due to a decrease in the average yield to 3.12% for the year ended December 31, 2010 from 4.02% for the year ended December 31, 2009.

Interest expense on interest-bearing deposit accounts decreased to $6.6 million for the year ended December 31, 2010, compared to $10.0 million for the year ended December 31, 2009. The decrease was due to a decrease in the rate paid to 1.65% for the year ended December 31, 2010, from 2.39% for the year ended December 31, 2009. Interest expense on other borrowings decreased to $1.3 million for the year ended December 31, 2010, compared to $1.4 million for the year ended December 31, 2009. The decrease in interest expenses on other borrowings was due to a decrease in the average yield to 3.01% for the year ended December 31, 2010 from 3.40% for the year ended December 31, 2009.

Provision for Loan Losses. Provisions for loan losses are based on our review of the historical loan loss experience and such factors which, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. The allowance is based on ongoing assessments of the estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriate allowance level consists of several key elements described below.

Our methodology incorporated the calculation of loans considered impaired and allocations for performing portfolio categories based on applying historical charge off data for loans categorized by similar risk characteristics based on our experience. The methodology includes an unallocated portion (qualitative factors) justified by current general market conditions, trends in performance (delinquency), economic and political trends.

Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, the allowance is allocated to individual loans based on our estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flows and available legal options. Included in the review of individual loans are those that are impaired. Any specific reserves for impaired loans are measured based on the fair value of the underlying collateral. The collectability of both principal and interest is evaluated when assessing the allowance. Historical loss rates are applied to other commercial loans not subject to specific allocations.

Homogenous loans, such as installment and residential mortgage loans, are not individually reviewed by management. The allowance is established for each pool of loans based on the expected net charge-offs. Loss rates are based on the average net charge-off history by loan category.

Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the local economy, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and our internal credit review function. The allowance relating to individual loans and historical loss rates are reviewed throughout the year and adjusted as necessary based on changing borrower and collateral conditions and actual collection and charge-off experience.

 

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Index to Financial Statements

The provision for loan losses was $16,599,000 for the year ended December 31, 2010, compared to $11,125,000 for the year ended December 31, 2009. On September 30, 2010, an additional $6.7 million was added to the provision due to the augmented level of nonperforming loans as a result of deteriorating economic conditions; primarily declining home values and higher unemployment rates in the four markets that the Company serves.

The allowance for loan losses is $11.7 million for the year ended December 31, 2010. While management believes that its allowance for loan losses is adequate as of December 31, 2010, future adjustments to the allowance for loan losses may be necessary as economic conditions dictate.

Noninterest Income. Noninterest income increased to $2.4 million for the year ended December 31, 2010, from $2.0 million for the year ended December 31, 2009. The increase was primarily due to $1,005,000 in security gains recorded for the year ended December 31, 2010.

Noninterest Expenses. Total noninterest expenses for the year ended December 31, 2010 were $13.7 million compared to $13.3 million for the year ended December 31, 2009. The increase was primarily due to expenses related to impaired loans and REO.

Income Taxes (Benefit). Income taxes (expense) for the year ended December 31, 2010, were $5.2 million compared to a benefit of $(3.2) million for the year ended December 31, 2009.

Comparison of the Years Ended December 31, 2009 and 2008

General. We recorded a net loss of $4.9 million for the year ended December 31, 2009 compared to a net loss of $3.6 million for the year ended December 31, 2008. The decline in earnings was due to increased credit losses.

We recorded a net loss available to common stockholders, after dividends paid on our Series A Preferred Stock held by the Treasury and amortization of preferred discount, for the year ended December 31, 2009 of $5.5 million or $(1.31) earnings per basic share and $(1.31) earnings per diluted share compared to a net loss of $3.6 million or $(.88) earnings per basic share and $(.88) earnings per diluted share for the year ended December 31, 2008.

The $1.3 million increase in losses reflected a $1.9 million increase in provision for loan losses, which made the loan loss reserve balance $7.8 million, or 1.92% of gross loans. Net loan charge-offs were $11.5 million for 2009, compared to $5.5 million for 2008.

Net Interest Income. Interest income decreased to $25.7 million during the year ended December 31, 2009, from $27.1 million in 2008. Interest on loans for the year ended December 31, 2009 decreased to $23.5 million from $25.4 million for the year ended December 31, 2008. The decrease in interest income on loans was attributable to a decline in the average yield on loans from 6.52% for the year ended December 31, 2008 to 5.72% for the year ended December 31, 2009. The declining loan yield reflected a full year impact of the lower interest rate environment and the impact of the loss of income on increasing balances of nonaccrual loans. Interest on securities increased to $2.1 million for the year ended December 31, 2009 from $1.4 million for the year ended December 31, 2008. The increase in interest income on securities was due to an increase in the average balance of securities to $53.2 million for the year ended December 31, 2009 compared to $29.0 million for the year ended December 31, 2008.

Interest expense on interest-bearing deposit accounts decreased to $10.0 million for the year ended December 31, 2009, compared to $10.8 million for the year ended December 31, 2008. The decrease was due to a decrease in the rate paid to 2.39% for the year ended December 31, 2009 from 3.21% for the year ended December 31, 2008. Interest expense on other borrowings decreased to $1.4 million for the year ended December 31, 2009, compared to $1.8 million for the year ended December 31, 2008. The decrease was due to a decrease in the average balance of other borrowings to $41.6 million for the year ended December 31, 2009 from $53.3 million for the year ended December 31, 2008. The average rate paid on other borrowings declined to 3.40% for the year ended December 31, 2009 compared to 3.44% for the year ended December 31, 2008.

Provision for Loan Losses. Provisions for loan losses are based on our review of the historical loan loss experience and such factors which, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. The allowance is based on ongoing assessments of the estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriate allowance level consists of several key elements described below.

Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, the allowance is allocated to individual loans based on our estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flows and available legal options. Included in the review of individual loans are those that are impaired. Any specific reserves for impaired loans are measured based on the fair value of the underlying collateral. The collectability of both principal and interest is evaluated when assessing the allowance. Historical loss rates are applied to other commercial loans not subject to specific allocations.

 

40


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Index to Financial Statements

Homogenous loans, such as installment and residential mortgage loans are not individually reviewed by management. The allowance is established for each pool of loans based on the expected net charge-offs. Loss rates are based on the average net charge-off history by loan category.

The provision for loan losses was $11,125,000 for the year ended December 31, 2009 compared to $9,237,000 for the year ended December 31, 2008. Economic weakness continued to stress the loan portfolio and affected the levels of nonperforming assets and charge-offs. The allowance for loan losses was $7.8 million for the year ended December 31, 2009.

Noninterest Income. Noninterest income increased to $2.0 million for the year ended December 31, 2009 from $1.9 million for the year ended December 31, 2008. The increase was primarily due to $440,000 in security gains recorded for the year ended December 31, 2009, partially offset by a $412,000 decline in income from bank owned life insurance resulting from a death benefit collected in 2008.

Noninterest Expenses. Total noninterest expenses increased to $13.3 million for the year ended December 31, 2009 from $13.2 million for the year ended December 31, 2008. First Community Bank’s FDIC assessment fees increased $0.5 million over the prior year.

Income Taxes (Benefit). Income taxes (benefit) for the year ended December 31, 2009 were (3.2) million compared to $(2.4) million for the period ended December 31, 2008.

Selected Quarterly Results

Selected quarterly results of operations for the four quarters ended December 31, 2010 and 2009 are as follows. All per share amounts reflect the 5% stock dividends paid in March 15, 2005 and February 28, 2007, and the three-for-two stock split issued on January 20, 2006 (in thousands, except share amounts):

 

     2010  
     Fourth
Quarter
    Third
Quarter
    Second
Quarter
    First
Quarter
 

Interest income

   $ 5,225      $ 5,276      $ 5,621      $ 5,998   

Interest expense

     1,644        1,884        2,068        2,344   
                                

Net interest income

     3,581        3,392        3,553        3,654   

Provision for loan losses

     450        8,359        3,849        3,941   
                                

Net interest income (loss) after provision for loan losses

     3,131        (4,967     (296     (287

Noninterest income

     102        870        774        597   

Noninterest expense

     3,910        3,105        3,327        3,382   
                                

Loss before income taxes

     (677     (7,202     (2,849     (3,072

Income taxes (benefit)

     —          —       6,428        (1,200
                                

Net loss

   $ (677   $ (7,202   $ (9,277   $ (1,872
                                

Basic earnings per share

   $ (.15   $ (1.34   $ (1.72   $ (.42

Diluted earnings per share

   $ (.15   $ (1.34   $ (1.72   $ (.42
     2009  
     Fourth
Quarter
    Third
Quarter
    Second
Quarter
    First
Quarter
 

Interest income

   $ 6,292      $ 6,400      $ 6,513      $ 6,522   

Interest expense

     2,619        2,840        2,937        2,988   
                                

Net interest income

     3,673        3,560        3,576        3,534   

Provision for loan losses

     4,423        4,670        1,337        695   
                                

Net interest (loss) income after provision for loan losses

     (750     (1,110     2,239        2,839   

Noninterest income

     397        757        480        378   

Noninterest expense

     3,576        3,458        3,230        3,154   
                                

(Loss) Earnings before income taxes

     (3,929     (3,811     (511     63   

Income taxes (benefit)

     (1,501     (1,477     (230     (6
                                

Net (loss) earnings

   $ (2,428   $ (2,334   $ (281   $ 69   
                                

Basic earnings per share

   $ (.62   $ (.59   $ (.10   $ (.02

Diluted earnings per share

   $ (.62   $ (.59   $ (.10   $ (.02

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

 

Item 8. Financial Statements and Supplementary Data

The financial statements required by this item are located beginning on page 57 of this report.

 

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

 

Item 9A(T). Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this report, our Chief Executive Officer and Chief Financial Officer concluded that, subject to the limitations noted below, our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

(b) Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Such internal controls over financial reporting were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, we used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

(c) Changes in Internal Controls

We have made no changes in our internal controls over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(d) Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Accounting Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within First Community have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

 

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Index to Financial Statements

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Item 9B. Other Information.

Not Applicable.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

BOARD, EXECUTIVE OFFICERS, AND COMMITTEES

Our Board of Directors is currently comprised of Brad Bishop, Kenneth P. Cherven, Kenneth Delarbre, Kenneth Faliero, James Macaluso, David K. Meehan, Robert G. Menke and Robert M. Menke. Information relating to the business experience and age of each director is set forth in the following table. We have also included the same information for non-director executive officers.

Directors of First Community

 

Incumbent

   Age   

Business Experience

Brad Bishop    68    Mr. Bishop has served as a Director of First Community and as a Director of First Community Bank since April 2005, and serves as Chairman of the Bank’s Charlotte County Region. Mr. Bishop is originally from Shelbyville, Indiana and has been a resident of Charlotte County and Southwest Florida since 1960. Mr. Bishop graduated from Florida State University. Mr. Bishop brings to our Board 26 years of experience in the banking business, including 16 years as CEO and President of the Port Charlotte Bank and Trust Company which became the SunTrust Bank of Charlotte County. He has been active in the Florida Bankers Association, Bank Administration Institute, and the American Bankers Association, as well as many local charities and civic organizations. Mr. Bishop has been with RE/Max Harbor Realty since 1995 as a Commercial Realtor, where he has remained active in both commercial and residential sales. He holds a Florida General Contractors license and is currently a partner of the new professional center called Central Park that is located in Port Charlotte. He also is a partner in the Riverside RV Resort and Campground which is located on the Peace River. Mr. Bishop’s real estate knowledge is invaluable to our Board in effectively evaluating real estate market conditions and trends.
Kenneth P. Cherven    51    Mr. Cherven is Chief Executive Officer and President, and Director of First Community and is Chief Executive Officer and Director of First Community Bank. He has been a Director of First Community and a Director of First Community Bank since July 2000. Mr. Cherven also serves as an Advisory Director of the Pinellas, Pasco, Charlotte and Hillsborough County Regions. Mr. Cherven has been our Chief Executive Officer and President since July 2000, but has been in banking in Florida since 1981. Mr. Cherven has served as Chief Executive Officer and President of two local and regional banks – first at Gulf Bank where he served from 1989 to 1993 and then at Premier Community Bank, where he served from 1994 to 1999. Mr. Cherven has a MBA degree in Business from the University of Tampa and a Bachelor’s degree in Finance from Florida Southern College. Mr. Cherven is Past Chairman of the Foundation Board of St. Petersburg College, and currently serves on the College’s Advisory Board for the Banking Program, which he was instrumental in establishing. Mr. Cherven was named 2008 Banker of the Year by the Florida Bankers Association. Mr. Cherven provides the Board with information gained from hands-on management, identifying our near-term and long-term challenges and opportunities. He was selected to serve as a Director on our Board due to his depth of banking knowledge and extensive management and leadership skills.

 

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Index to Financial Statements

Incumbent

   Age   

Business Experience

Kenneth Delarbre    68    Mr. Delarbre has served as a Director of First Community Bank since November 2004 and as a Director of First Community since April 2005. He is a Certified Public Accountant, initially with the Florida-based firm of Morrison & Delarbre, P.A., in Tampa/Clearwater from 1971 to 1995, and since then has been with Kenneth Delarbre & Company, P.A., where he is the managing shareholder of the Clearwater, Florida office. He is a member of the American Institute of Certified Public Accountants (AICPA) and the Florida Institute of Certified Public Accountants (FICPA). Mr. Delarbre has been in banking in Florida since 1988, serving as Chairman of the Board and Chief Executive Officer of Gulf Bank from 1989 to 1993; as a Director of SouthTrust Bank, N.A. from 1993 to 1999; as an advisory Director of Florida Bank, N.A. from early 2000 to January 2003; as a Director and member of the Audit Committee of Florida Bank, N.A. from February 2003 to December 2003; and as a Director and member of the Audit Committee of Florida Bank, Inc. (the holding company) from January 2004 to July 2004 when the Florida Bank, Inc. was sold to the South Financial Group in South Carolina. Mr. Delarbre was selected to serve as a Director on our Board due to his extensive financial and banking experience. Mr. Delarbre qualifies as an “audit committee financial expert” under SEC guidelines.
Kenneth F. Faliero    70    Mr. Faliero has served as a Director of First Community and as a Director of First Community Bank since July 2007. He is also Chairman of the Bank’s Hillsborough County Region. Mr. Faliero brings to our Board over 45 years experience in the banking industry; with expertise on the credit side. He has been in banking in Florida since 1978 having served as Executive Vice President and Chief Operating Officer for Exchange Bank from 1978 to 1983, when the bank was sold to NCNB and Mr. Faliero served as Executive Vice President and Regional Executive for West Florida from 1983 to 1984. Mr. Faliero was Executive Vice President and Regional Executive for Central Florida with Florida National Bank from 1984 to 1988, and served as Executive Vice President and Chief Credit Officer for SouthTrust Bank from 1988 until his retirement in 2005.
James Macaluso    67    Mr. Macaluso has served as a Director of First Community and as a Director of First Community Bank since January, 1999. He is also a Director and Chairman of the Bank’s Pinellas County Region. Since 1991, Mr. Macaluso has been an accountant and President of Macaluso & Company, P.A., in St. Petersburg, Florida. Mr. Macaluso is a former member of the Board of Directors of Marine Bank of St. Petersburg, Florida, where he served for 12 years. At Marine Bank he also served as Chairman of the Audit Committee. Mr. Macaluso is a 1970 graduate of the University of South Florida where he was a member of the Gold Key Honor Society and a member of the Honor Society of Phi Kappa Phi. Mr. Macaluso was selected to serve as a Director on our Board due to his banking experience and extensive background in public accounting, specializing in tax.
David K. Meehan    64    Mr. Meehan is a Director and Vice Chairman of First Community and a Director and Vice Chairman of First Community Bank. He has served in these positions since June 1995. Mr. Meehan is also Chairman of the Bank’s Pasco County Region. He joined the organizers of Bankers Insurance Group, Inc. in 1976 as Corporate Secretary and was appointed its President in 1979. He is currently President of Bankers Financial Corporation, and Chairman of the Board and President of Bankers Insurance Company, First Community Insurance Company, and Bankers Life Insurance Company. In 1999, Mr. Meehan was appointed by Florida Governor Jeb Bush as Commissioner of the Florida Fish and Wildlife Conservation Commission. He was reappointed by the Governor in July 2002 to serve another 5-year term. Mr. Meehan has served on the Boards of Governors of the Florida Joint Underwriting Association, the Florida Insurance Council, the Florida Property and Casualty Joint Underwriting Association, Insurance Management Solution Group, Inc. and the Florida Residential Property and Casualty Joint Underwriting Association. Mr. Meehan is also a member of the Florida State University Alumni and Advisory Board, past Marketing Committee Chairman for the National Flood Insurance program, and past Chairman and President of the Florida Association of Domestic Insurance Companies. Mr. Meehan brings to our Board more than 35 years of management experience with valuable insights gained in developing customer relationships, ethical practices, and business processes.

 

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Index to Financial Statements

Incumbent

   Age   

Business Experience

Robert G. Menke    49    Mr. Menke has served as a Director of First Community and as a Director of First Community Bank since April 2000. Mr. Menke is the son of Robert M. Menke, our Chairman. He is currently President and co-owner of Riscserv, LLC, an insurance outsourcing and software provider. Prior to that, from 1985 to 2002, Mr. Menke was with Bankers Financial Corporation, where he held many titles including Chief Executive Officer and President of P&C Companies. Mr. Menke has an MBA from the University of South Florida. Mr. Menke brings to our Board his management experience that equips him to contribute to the Board’s oversight of business processes and technology initiatives.
Robert M. Menke    77    Mr. Menke is Chairman of the Board of First Community and is Chairman of the Board of First Community Bank. He has served in these positions since June 1995. Mr. Menke founded Bankers Insurance Group in 1976 and has been its Chairman of the Board since inception. Mr. Menke brings to our Board his insights as a principal owner of a corporate parent to a diverse array of enterprises, with duties in financial management, sales and marketing, risk management and relationship development. Mr. Menke was honored as “Insurance Man of the Year” in 1986 by the Florida Association of Domestic Insurance Companies. Mr. Menke is also a member of the Property & Casualty Insurance Association of America. He is currently a director of Bankers Financial Corporation, Bankers Specialty Insurance Company, First Community Insurance Company, Bankers Life Insurance Company and Bankers Insurance Company.

Non-Director Executive Officers of First Community

 

Name

   Age   

Business Experience

Scott C. Boyle    56    Mr. Boyle is Regional President of Pinellas County. Mr. Boyle has served in that capacity since January 1999. Mr. Boyle has worked in banking in Florida since 1977. From June 1990 to January 1999, Mr. Boyle was with First Central Bank in St. Petersburg, Florida, as Senior Vice President-Commercial Lending. Mr. Boyle has a Bachelor’s degree in Business and Finance from the University of Florida and is a graduate of the School of Banking of the South at LSU. Mr. Boyle is past President of the Kiwanis Club of St. Petersburg, is an active member of the St. Petersburg Chamber of Commerce, volunteers as a mentor in the Pinellas County school system and Big Brothers/Big Sisters of Tampa Bay, and serves as a Director of Neighborhood Lending Partners of West Florida, Inc., a lending consortium providing low-moderate income housing units throughout Florida.
Ralph W. Cumbee    54    Mr. Cumbee is Regional President of Pasco County. He has served in that capacity since June 2006. Mr. Cumbee has worked in banking since 1987. From December 1993 to June 2006, Mr. Cumbee was with the First National Bank of Pasco as Executive Vice President and Chief Lending Officer. Mr. Cumbee has a Bachelor’s degree in Finance from the University of South Florida, and is a graduate of the Graduate School of Banking of the South at LSU. He also holds a Professional Masters of Banking from the Executive Banking Institute. Mr. Cumbee is a Board member of Workforce Housing Ventures, a non-profit focused on providing affordable housing, and serves as Vice-Chair. He is also the Scout Master of Troop 402 and is active in the Dade City Rotary Club, and Dade City Chamber of Commerce.
Ronald R. Monck    59    Mr. Monck is Regional President of Charlotte County. He joined First Community Bank in January 2008 as Senior Vice President and was appointed Regional President in January 2009. Mr. Monck has worked in banking since 1972. From 1983 to 1998, Mr. Monck served in several management positions with Barnett Bank. From 1998 to January 2008, he served as Senior Vice President/Punta Gorda Executive with Charlotte State Bank. Mr. Monck attended Lake Superior State College in Michigan, and is a graduate of the Northern Michigan University School of Banking and the American Bankers Association National Commercial Lending School. Mr. Monck is active in the Punta Gorda Chamber of Commerce and serves as Chairman of the Charlotte Community Foundation.

 

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Name

   Age   

Business Experience

Clifton E. Tufts    50    Mr. Tufts is Executive Vice President and has served in that position since February 2003. From 1998 to February 2003, he served as Senior Vice President and then Executive Vice President of Premier Community Bank of Florida. Mr. Tufts also served as Head of the Association Services Division for Premier’s holding company, P.C.B. Bancorp, Inc. Mr. Tufts is a graduate of Stetson University and has a BBA degree in Accounting. He is a Certified Public Accountant in the State of Florida and is a graduate of both the Florida School of Banking and the Graduate School of Banking at LSU.

First Community Committees

First Community’s Board of Directors has five standing committees: the Audit Committee, Compensation Committee, Nominating Committee, Executive Committee, and the Corporate Governance Committee. The Board of Directors meets monthly. No director attended fewer than 75% of the Board and Committee Meetings in which he was eligible to participate in 2010. From January through October 2010, the following fees were paid for attendance; in November 2010 Board and Committee fees of First Community and First Community Bank of America (“First Community Bank”) were suspended indefinitely.

Directors received $600 per meeting, with no additional fee paid to the Chairman. Committee members are compensated $300 per Board Committee meeting attended except for the Audit Committee. Members of the Audit Committee received $600 per meeting attended, with the Chairman receiving $800 per meeting. Chief Executive Officer and President Kenneth P. Cherven did not receive any fees for his service on the Board or any Committee.

The Board of Directors of our subsidiary, First Community Bank, is divided into two committees: Asset/Liability and the Loan Committee. All members of First Community Bank’s Board of Directors serve on the Loan Committee. Members of the Asset/Liability Committee received $300 per meeting attended, and Members of the Board received $150 per Loan Committee meeting attended. No additional fees are paid to their respective Chairmen.

Board members of First Community Bank received $600 per meeting attended, with the Chairman receiving $800 per meeting. The Bank also has Regional Boards for its Pinellas County, Pasco County, Hillsborough County and Charlotte County markets. Regional Board members received $300 per meeting, with no additional fees paid to their respective Chairmen. Regional Board members for Pasco County received no fees in 2010.

The composition of and number of meetings held by each committee of First Community in 2010 is reflected in the following table:

 

Board Member

   Audit      Nominating      Executive      Corporate
Governance
     Compensation  

Kenneth P. Cherven

           X         X      

Brad Bishop

     X         X            X         X   

Kenneth Delarbre

     Chair         X               Chair   

Kenneth F. Faliero

     X         X         X            X   

James Macaluso

     X         Chair         X            X   

David K. Meehan

           X         Chair      

Robert G. Menke

              X      

Robert M. Menke

           Chair         

Meetings in 2010

     4         1         1         1         2   

 

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The Board Committees were established in 2003, following our listing on the NASDAQ SmallCap market, now known as the NASDAQ Capital Market. The Board Committees and their responsibilities are as follows:

The Audit Committee serves as an independent and objective party to monitor First Community’s financial reporting process and internal control system. The Committee’s responsibilities, which are discussed in detail in its charter, include, among other things, the appointment, compensation, and oversight of the work of First Community’s independent auditing firm, as well as reviewing the independence, qualifications, and activities of the auditing firm. First Community’s independent auditing firm reports directly to the Committee. The Committee’s charter was included in the proxy statement for the 2010 Annual Shareholders’ Meeting as Appendix 1. The composition of the Audit Committee was examined during the year by the Board of Directors in light of the NASDAQ and Securities Exchange Commission rules requiring that all members of the Audit Committee be “independent directors”. Based upon this examination, the Board determined that all of the members of our Audit Committee qualify as “independent directors” within the meaning of these rules. Director Kenneth Delarbre, a CPA with extensive bank management and auditing experience, has the requisite financial expertise to qualify as an “audit committee financial expert” as defined by Securities Exchange Commission Rules. Accordingly, the Board has designated him as the “audit committee financial expert.”

The Nominating Committee meets as needed and is responsible for recommending the number of directors to serve for the ensuing period, recommending the number of directors to be elected by the shareholders, and for selecting nominees for consideration by the full Board to stand for election at the annual meetings of shareholders and to fill vacancies between annual meetings. The Nominating Committee’s responsibilities are outlined in its charter, which was included in the 2010 proxy statement as Appendix 2. The members are “independent” under the listing standards contained in the NASDAQ rules. First Community does not have any specific procedures or policies for considering shareholder nominations, but will consider shareholder nominations on a case-by-case basis. The Board of Directors believes that, as a community bank holding company, qualified directors may be identified by directors, officers, employees and shareholders, and intends to evaluate each qualified nominee individually, based upon his or her experience and qualifications, regardless of the source of the recommendation of such person as a nominee.

The Executive Committee meets as needed and has all the authority of the Board of Directors when the Board of Directors is not in session, except as specially limited by the Board or the Florida law. The Executive Committee does not operate pursuant to a charter.

The Corporate Governance Committee meets at least annually and is responsible for monitoring and overseeing compliance with NASDAQ’s Corporate Governance rules, recommending to the Board corporate governance guidelines, and overseeing education programs for the Board. The Corporate Governance Committee’s responsibilities are outlined in its charter, which was included in the 2010 proxy statement as Appendix 3.

The Compensation Committee reviews and serves with regard to compensation and personnel policies, programs and plans, including management development and succession, and considers and approves executive compensation and employee benefit programs. The members are “independent” under the listing standards contained in the NASDAQ rules. The Compensation Committee’s responsibilities are outlined in its charter, which was included in the 2010 proxy statement as Appendix 4.

Code of Ethics

We have adopted a Code of Ethics that applies to our principal executive and financial officers. Persons who would like a copy of such Code of Ethics may receive one without charge upon request made to Kay M. McAleer, Vice President/Corporate Secretary, First Community Bank Corporation of America, 9001 Belcher Road, Pinellas Park, Florida 33782.

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors and any person who beneficially owns more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors and more than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms which they file. During 2010, certain of our directors and executive officers who own our stock filed Form 3s or Form 4s with the Securities and Exchange Commission. The information on these filings reflects the current ownership position of all such individuals. Based solely on the review of copies of the filings we have received or written representations from such reporting persons, it is our belief that during 2010, all such filings by our officers, directors or 10% shareholders were timely made.

 

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Item 11. Executive Compensation.

Executive Compensation Conditions For Participation in Capital Purchase Program

On October 14, 2008, the U.S. Department of Treasury (“Treasury”) announced a program under the Emergency Economic Stabilization Act of 2008 (“EESA”). Pursuant to this program, Treasury would make preferred stock investments in participating financial institutions (the “Capital Purchase Program” or “CPP”). On February 17, 2009, President Obama signed into law the America Reinvestment and Recovery Act of 2009 (“ARRA”) which amended EESA, thereby revising certain compensation and governance restrictions in EESA applicable to CPP participants. Treasury has also issued regulations implementing various provisions of EESA, as amended by ARRA. Throughout this Proxy Statement, we refer to EESA to mean EESA as amended by ARRA and as implemented pursuant to regulations issued by Treasury.

First Community participated in the Capital Purchase Program by selling preferred stock and related common stock purchase warrants to Treasury. As a result of its participation in the CPP, First Community became subject to the compensation and governance restrictions implemented by EESA, which apply to our Senior Executive Officers (“SEOs”) and other highly paid employees. A discussion of the compensation and governance restrictions follows below.

Risk Review: EESA prohibits First Community from providing incentive compensation arrangements that encourage its SEOs to take unnecessary and excessive risks that threaten the value of the financial institution or that would encourage manipulation of the reported earnings in order to enhance the compensation of any of its employees. EESA requires the Compensation Committee to meet with First Community’s senior risk officer at least semiannually to evaluate and assess the risks posed by employee compensation plans and to certify that such plans do not encourage: (i) the SEOs to take unnecessary and excessive risks that threaten the value of First Community; and (ii) manipulation of the reported earnings in order to enhance the compensation of any of First Community’s employees.

Bonuses and Incentive Compensation: EESA prohibits the payment of any “bonus, retention award, or incentive compensation” to First Community’s most highly-compensated employee. The prohibition includes several limited exceptions, including payments under enforceable agreements that were in existence as of February 11, 2009 and limited amounts of “long-term restricted stock.”

Golden Parachutes: EESA prohibits any severance payment to an SEO or any of the next five most highly-compensated employees upon termination of employment for any reason. EESA provides an exception for amounts that were earned or accrued prior to termination, such as normal retirement benefits.

Clawbacks: EESA requires First Community to recover any bonus or other incentive payment paid to an SEO or any of the next 20 most highly compensated employees on the basis of materially inaccurate financial or other performance criteria.

Limit on Tax Deduction: For years in which the Treasury owns our preferred stock, First Community may not claim a deduction for compensation paid to a SEO in excess of the $500,000 compensation deduction limit of Section 162(m)(5) of the Internal Revenue Code, including certain performance-based pay previously excluded.

Policy on Luxury Expenditures: EESA required First Community to enact policy regarding excessive or luxury expenditures, which policy covers expenditures on entertainment, events, office and facility renovations, air and other travel and other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives or other similar measures conducted in the normal course of business.

Shareholder “Say-on-Pay” Vote Required: EESA requires First Community to include a non-binding shareholder vote to approve the compensation of executives as disclosed in the 2010 proxy statement.

Executive Certifications: EESA requires First Community’s CEO and CFO to provide a written certification of compliance with the executive compensation restrictions under EESA in its annual report on Form 10-K filed with the Securities and Exchange Commission.

As a condition to the closing of the CPP transaction, each of Kenneth P. Cherven, our Chief Executive Officer, Stan B. McClelland, our former Chief Financial Officer, Scott C. Boyle, our Regional President – Pinellas County, Michael J. Bullerdick, our former Regional President – Charlotte County, and Clifton E. Tufts, our Executive Vice President: (a) executed a waiver voluntarily waiving any claim against the Treasury or First Community for any changes to such officer’s compensation or benefits that are required to comply with the regulations issued by the Treasury under the CPP and acknowledging that the regulation may require modification of the compensation arrangements and agreements (including so-called “golden parachute” agreements) as they relate to the period the Treasury holds any securities of First Community acquired through the CPP; and (b) entered into a Capital Purchase Program Compliance Agreement with First Community so amending such compensation arrangements and agreements.

 

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The following table shows compensation information regarding Kenneth P. Cherven, Scott C. Boyle, and Clifton E. Tufts. These three officers are referred to as the “named executive officers,” or “NEOs,” in this annual report. No other executive officer received compensation at a level required to be reported herein by Securities and Exchange Commission regulations.

2010 SUMMARY COMPENSATION

 

Name and Principal Position

   Year      Salary
($)
     Bonus
($)
     All Other
Compensation
($)
    Total
($)
 

Kenneth P. Cherven
President & CEO

     2010         204,935         0         166,788 (1)      371,723   
     2009         204,935         0         165,944        370,879   

Scott C. Boyle
Regional President
Pinellas County

     2010         153,701         0         6,877 (2)      160,578   
     2009         153,701         0         6,877 (2)      160,578   
             

Clifton E. Tufts
Executive Vice President

     2010         145,937         0         5,000 (3)      150,937   
     2009         145,937         0         5,000 (3)      150,937   

 

(1)

Includes $148,256 and $148,256 accrued under the SERP, $7,200 automobile allowance, $1,862 and $2,427 for club membership dues, and $8,626 and $8,905 for hospital benefits and life insurance in 2009 and 2010, respectively.

(2)

Includes $1,877 and $1,877 for club membership dues in 2009 and 2010, respectively, and $5,000 for leased automobile.

(3)

Includes $5,000 for leased automobile.

The following table provides information on the holdings of stock option awards by the NEOs at December 31, 2010. The table includes both exercisable and unexercisable options together with the exercise price and the expiration date.

2010 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

Name

   Number of
Securities
Underlying
Unexercised
Options
(#)
     Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
     Option
Exercise
Price
($)
     Option
Expiration
Date
     Market Value
of  Shares
of Units
of Stock
That
Have Not
Vested ($)
 

Kenneth P. Cherven

     24,806         —         $ 4.84         1/1/2011         —     

President & CEO

     24,806         —         $ 4.84         1/1/2012         —     
     20,673         —         $ 4.84         1/1/2013         —     
     20,673         —         $ 4.84         1/1/2014         —     

Ralph W. Cumbee

     10,500         —         $ 19.19         7/17/2016         —     

Regional President

              

Pasco County

              

Clifton E. Tufts

     4,134         —         $ 5.80         2/28/2011         —     

Executive Vice President

     4,135         —         $ 5.80         2/28/2012         —     
     4,134         —         $ 5.80         2/28/2013         —     
     19,688         —         $ 15.36         3/28/2011         —     
     19,688         —         $ 7.85         12/31/2018         —     

Employment and Other Agreements with Named Executive Officers

Kenneth P. Cherven

Kenneth P. Cherven is the President and Chief Executive Officer of First Community and is also a member of the Board. On November 29, 2004, First Community entered into an amended and restated employment agreement with Mr. Cherven. Under his employment agreement, Mr. Cherven is to serve as President and Chief Executive Officer and is entitled to receive an annual base salary (currently $204,935), which is subject to annual review by the Compensation Committee or the Board of Directors. The employment agreement also provides that Mr. Cherven is eligible for an annual incentive bonus and other customary benefits. No bonus was awarded in 2010. The employment agreement provided for an initial three-year term, and thereafter is automatically renewed daily. The daily renewals (which automatically terminate on Mr. Cherven’s 65th birthday) can be terminated upon either party’s notice to the other to not continue the renewals. The Compensation Committee or Board of Directors is also required to semi-annually review Mr. Cherven’s performance to determine if the employment agreement renewals should continue.

 

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The employment agreement provides that Mr. Cherven’s employment may be terminated by First Community with or without cause, or by Mr. Cherven for “good reason” (as defined in the employment agreement), but that in the event of a termination by First Community without cause, or by Mr. Cherven for good reason, Mr. Cherven would be entitled to receive, as severance, a continuation of his salary for six months, as well as being permitted to participate in any employment benefit plans for one year, or until such time as he is able to participate in a comparable plan provided by another employer. If Mr. Cherven is terminated for cause, he will not be entitled to any benefits or compensation, other than what has been accrued. Dismissal for cause can be appealed under certain circumstances, within a defined period. Upon receipt of the notice of the appeal, First Community must submit the matter to arbitration. The decision of the arbitrator is binding on the parties and is non-appealable.

The employment agreement contains customary confidentiality provisions and a non-competition provision, whereby Mr. Cherven may not, during the period of his employment and for a period of six months after a termination of his employment, become employed, directly or indirectly, whether as an employee, independent contractor, consultant, or otherwise, with any federally-insured financial institution, financial holding company, bank holding company, or other financial services provider located in Charlotte, Hillsborough, Manatee, Pasco, Pinellas or Sarasota county, Florida, or in any other county where the Bank operates a full-service branch (the “Covered Area”) with any person whose intent it is to organize another such company or entity located in the Covered Area.

The employment agreement provides that in the event of a “change in control” of First Community (as defined in the employment agreement, which would include the Disposition), Mr. Cherven would be entitled to terminate his employment and receive a cash payment equal to 2.9 times his then current base salary (the “change-in-control payment”), to be paid within 10 days after the change in control. The change-in-control payment resulting from the Disposition would be $594,311. CBMHC and CB&C required in the Acquisition Agreement that any change-in-control payment under Mr. Cherven’s employment agreement that might result from the Disposition be paid by First Community.

Pursuant to the requirements of EESA, First Community is currently prohibited from making any severance or change in control payments to Mr. Cherven pursuant to the terms of his employment agreement. However, if the transactions contemplated by the Acquisition Agreement are consummated, EESA will no longer apply to First Community.

Following the execution of the Acquisition Agreement, CB&C indicated that it would like to have Mr. Cherven become an employee of CB&C following the merger of the Bank into CB&C; however, it indicated that it was unwilling to enter into an employment agreement with him or to engage him as chief executive officer. Thus, if Mr. Cherven did not terminate his employment with First Community and the Bank prior to the closing of the Disposition, he would lose all of the benefits of his employment agreement, including his right to the change-in-control payment.

In light of the estimated amount to be paid out to the holders of First Community common stock upon dissolution of First Community, on March 1, 2011, Mr. Cherven agreed to an amendment to his employment agreement pursuant to which his employment agreement will terminate upon the closing of the Disposition, and in lieu of the change-in-control payment of $594,311 provided for in his employment agreement, he will be entitled to receive a payment of $300,000 from First Community at the closing of the Disposition.

Retirement and Disability Benefits for Kenneth P. Cherven

First Community Bank adopted a supplemental executive retirement plan (“SERP”), entitled the First Community Bank Deferred Compensation Plan (the “Plan”), for Mr. Cherven in 2005, which is self-funded by First Community Bank. The Plan was amended and restated effective as of January 1, 2009, to comply with Internal Revenue Code Section 409A. Under the terms of the Plan, if Mr. Cherven has a separation from service (as defined in Section 409(A) of the Internal Revenue Code and applicable regulations) with First Community Bank, he will be entitled to receive a lump sum payment equal to the actuarial present value of an annual income paid to him for the remainder of his life equal to the vested portion of a specified percentage (the “Percentage”) of the aggregate amount of his annual base salary, bonus and incentive compensation received over the twelve months immediately preceding his last day of full-time employment, excluding any amounts realized from the exercise of qualified or non-qualified stock options or amounts realized from restricted stock (his “Final Compensation”), based upon the following vesting schedule:

 

Date Vested

   Percent  

Prior to July 1, 2010

     0

July 1, 2010

     50

July 1, 2011

     55

July 1, 2012

     60

July 1, 2013

     65

July 1, 2014

     70

July 1, 2015

     75

July 1, 2016

     80

July 1, 2017

     85

July 1, 2018

     90

July 1, 2019

     95

On or after October 2, 2019

     100

 

50


Table of Contents
Index to Financial Statements

For purposes of the Plan, actuarial present value means, with respect to determining the amount of the lump sum payment, an amount determined by using a six and one half percent (6.5%) discount rate and the Age 85 Mortality Table.

Notwithstanding the vesting schedule above, Mr. Cherven will become fully vested upon his total and permanent disability (as defined in the Plan). Further, if Mr. Cherven’s employment is involuntarily terminated for reasons other than for cause (as defined in the Plan) or he is terminated as a result of a change in control (as defined in the Plan) prior to July 1, 2015, he will be deemed to be 70% vested. If Mr. Cherven’s employment is terminated for cause, his vested percentage will be zero. In the event of his death while employed by First Community Bank, his beneficiary under the Plan will be entitled to receive 60% of the benefit that Mr. Cherven would have received had he retired on the date of his death.

The Percentage of his Final Compensation to which such vesting schedule relates will be 60% if his separation from service occurs prior to his reaching the age of 65, and 75% thereafter.

First Community maintains a 401(k) Plan for its employees. The 401(k) Plan permits participants to defer additional portions of their salary for retirement. At its discretion, First Community ma