Forward Looking Statements
 
This document contains forward-looking statements as defined by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve substantial risks and uncertainties. When used in this document, or in the documents incorporated by reference, the words “anticipate”, “believe”, “estimate”, “may”, “intend” and “expect” and similar expressions are some of the forward-looking statements used in these documents. Actual results, performance, or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements. Factors which may cause results to change materially include competition, inflation, general economic conditions, changes in interest rates, and changes in the value of collateral securing loans First Community Bank has made, among other things.
 
General
 
We are a Florida-based unitary savings and loan holding company with one bank subsidiary, First Community Bank of America (“First Community Bank”). Our bank subsidiary has four branch locations in Pinellas and Charlotte Counties. During 2005, we anticipate opening three additional offices, two in Hillsborough County and one in Charlotte County.
 
We own all of the outstanding common stock of First Community Bank and First Community Lender Services, Inc. Our primary business activity is the operations of First Community Bank. First Community Bank is a federally-chartered stock savings bank that provides a variety of banking services to small and middle market businesses and individuals through its three banking offices located in Pinellas County and one banking office located in Charlotte County, Florida. First Community Lender Services, Inc., was incorporated during 2001 and had minimal activity for the years ended December 31, 2004 and 2003.
 
Strategy
 
We see tremendous opportunity to capitalize on the opportunities created by the continuing changing competitive landscape due to mergers and consolidation. These mergers include the acquisitions of:
 
  •   P.C.B. Bancorp, Inc. by Colonial BancGroup, Inc.  
  •   Madison Bankshares by Whitney Holdings, Inc.  
  •   SouthTrust Bank by Wachovia Corporation  
  •   First National Bankshares by Fifth Third Bancorp  
We believe that the mergers and consolidation have reduced the levels of personalized services. Even though, typically, the national and regional financial institutions have more products and more locations, they lose that personal service touch that we offer. The most frequent customer complaints we hear about the national and regional institutions are the lack of personalized service and the turnover in personnel, which limits the customer’s ability to develop a relationship with his or her banker. Customers are willing to make a change in order to have that personalized service, and we believe a significant opportunity exists to attract and retain these customers who are dissatisfied with their current banking relationship.
 

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, all under the same charter. Each Region is operated as 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 enabling 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.
 
Market Focus
 
We focus our marketing efforts 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.
 
Future Growth
 
In the next few years, we plan to have sufficient capital on hand to take advantage of growth opportunities either through the acquisition of small banks in identified strategic markets, or through the acquisition of branch sites that may come available in markets we are trying to penetrate. Currently, we have no specific acquisition candidates targeted. During 2005, we anticipate opening three new offices. Two of the offices will be in our newly formed Hillsborough County Region and the third office will be in our Charlotte County Region. The acquisition or formation of banks, the purchase of branch facilities, and the establishment of new branch facilities are subject to regulatory approvals and other requirements. See the “Supervision and Regulation” section for more details regarding the requirements surrounding the acquisition or formation of banks.
 
First Community Bank of America
 
First Community Bank, our primary operating subsidiary, is a federally-chartered stock savings bank providing a variety of banking services to small and middle market businesses and individuals through its offices in Pinellas and Charlotte Counties. As of December 31, 2004, First Community Bank had assets of approximately $242 million, net loans of $206 million and deposits of $201 million. Due to our strong focus on commercial lending, approximately 59 % of our total loans are commercial and 19% of our total deposits are comprised of non-interest bearing checking accounts.
 

Products and Services
 
General. 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.efirstcommbank.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 use our 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 to allocate our loan portfolio as follows: 60% to real estate loans; 20% 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.
 
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 collectibility of loans in our portfolio and a percentage of the outstanding balances of specific loans when their ultimate collectibility 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 “ses” 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. Construction and development loans are made on both a pre-sold and speculative basis, and generally have a fixed interest rate. If the borrower has entered into an arrangement to sell the property prior to beginning construction, we consider the loan to be on a pre-sold basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, we consider the loan to be on a speculative basis. We make residential and commercial construction loans to builders and developers, as well as to consumers who wish to build their own homes. As of December 31, 2004, our construction real estate portfolio consists of 35% residential and 65% commercial real estate loans or $13.4 million in construction loans. We limit the term of most construction and development loans to 12 months, although we may structure the payments based on a longer amortization basis. We base speculative loans on the borrower’s financial strength and cash flow position. Loan proceeds are disbursed based on the percentage of completion and only after an experienced construction lender or appraiser inspects the project. These loans generally command higher rates and fees commensurate with the risks warranted in the construction loan field. The risk in construction lending depends upon the performance of the builder in building the project to the plans and specifications of the borrower and our ability to administer and control all phases of the construction disbursements. Upon completion of the construction, we typically convert construction loans to permanent loans.
 
Residential Real Estate Loans. We make adjustable or fixed-interest rate residential real estate loans 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 fluctuations in real estate market values and minimize losses that could result from a downturn in the residential real estate market. We sell mortgage loans that do not conform to our policies in the secondary markets. The risk of these loans depends on our ability to sell the loans to national investors and on the frequency of interest rate changes. Our residential real estate loans are primarily in Florida.
 
We limit interest rate risk and credit risk on these loans by locking in the interest rate for each loan with a secondary market investor and receiving a forward sales agreement from the secondary market investor. Loans are retained for our portfolio when there is sufficient liquidity to fund the needs of the established customers and when rates are favorable to retain the loans. The loan underwriting standards and policies are generally the same for both loans sold in the secondary market and those retained in our portfolio.
 
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.
 
In addition, we have been approved for participation in the OTS pilot program which allows us to lend up to 25% of our capital and surplus on certain types of loans.
 
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;  
  •   Direct deposit of payroll and social security checks;  
  •   Deposit pick-up for commercial customers;  
  •   Online banking/bill payment services;  
  •   Wire transfers and ACH services;  
  •   Automatic drafts for various accounts;  
  •   1031 Exchange Services;  
  •   Certificate of Deposit Account Registry Service (CDARS)  
  •   Debit cards; and  
  •   VISA® and MasterCard® credit card services through our correspondent banks.  
We also offer extended banking hours (both drive-in and lobby) and an after-hours depository. We are associated with a shared network of automated teller machines that customers may use throughout our market areas and other regions. We are 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
 
We believe that the mergers in our market areas this past year and the consolidation of the Florida banking industry over the last several years provides community-oriented banks such as ours, significant opportunities to build a successful, locally managed bank. We further 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.
 
First Community Lender Services, Inc.
 
First Community Lender Services, Inc. was incorporated in 2001 as a wholly owned subsidiary of First Community. First Community Lender Services was originally established to network with title insurance vendors. In November 2004, 1031 Exchange services were added. A 1031 Exchange allows customers to sell an 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. First Community Lender Services has had little activity to date.
 
Information About Our Primary Markets
 
We currently consider our primary market areas to be Pinellas, Hillsborough, and Charlotte Counties. 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. In 2003, Pinellas County estimated its population at approximately one million. In 2002, it was the fifth most populous county in Florida. The City of St. Petersburg is located in southeast Pinellas County. 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 and, as of 2003, estimated its population at 1,083,520. The City of Tampa is the largest city in Hillsborough County and is the third
 

most populous city in Florida. Hillsborough’s key business segments include tourism, agriculture, construction, finance, health care, government, and technology. Charlotte County is located between Lee County (Fort Myers) and Sarasota County in Southwest Florida on the Gulf of Mexico. It is about 100 miles south of St. Petersburg. Charlotte County estimated its population in 2003 at 151,994. Charlotte County’s top two business segments are service industries and construction. In 2002, the Men’s Journal named it one of “50 Best Places To Live,” Florida Tread recognized the Punta Gorda area in a 2001 article on “Small Town Gems.” Charlotte County has received similar recognition every year since 1997.
 
Competition
 
We are subject to intense competition in our primary market areas. We face substantial competition in all phases of our operations from a variety of different competitors. 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 directly, 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
 
First Community has no employees of its own and operates using employees of First Community Bank. First Community Bank currently employs 53 full-time personnel and 7 part-time persons.
 

SUPERVISION AND REGULATION
 
General
 
We are a registered unitary savings and loan holding company within the meaning of the Home Owners’ Loan Act (“HOLA”). We, and our subsidiary, 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 (“OTS”), 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.
 
Regulation of the Holding Company
 
Restrictions on the Acquisition of Savings Institutions. Section 1467a of the HOLA provides that no holding company, directly or indirectly or acting in concert with one or more persons, or through one or more subsidiaries, or through one or more transactions, may acquire “control” of an insured savings institution at any time without the prior approval of the OTS. In addition, any holding company that acquires such control becomes a savings and loan holding company subject to registration, examination and regulation under HOLA and the regulations promulgated thereunder. 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 OTS also has established certain rebuttable control determinations. An acquiror must file for approval of control with the OTS, or file to rebut the presumptions before surpassing a rebuttable control level of ownership. To rebut the presumption, the acquiror must file a submission with the OTS setting forth the reasons for rebuttal. The submission must be filed when the acquiror 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 acquiror would be one of the two largest stockholders of any class of voting stock;  
  •   The acquiror and/or the acquiror’s representative or nominees would constitute more than one member of the savings bank’s board of directors; and  
  •   The acquiror or nominee or management official of the acquiror 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.  
Transactions with Affiliates. Our authority to engage in transactions with related parties or “affiliates” or to make loans to certain insiders 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.
 
In addition, 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 collectibility. 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 OTS regulations.
 
Support of Subsidiary Depository Institutions. Under OTS policy, First Community is expected to act as 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 a 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:
 
  •   The default of a commonly controlled FDIC-insured depository institution; or  
  •   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.
 
Payment of Dividends. There are statutory and regulatory limitations on the payment of dividends by First Community Bank. The ability of our bank subsidiary to pay a dividend to us is governed by the OTS’ capital distribution regulation. Under the regulation, we may make a capital distribution without the approval of the OTS, provided the OTS is notified 30 days before declaration of the capital distribution. We must also meet the following requirements:
 
  •   It is not of supervisory concern, and will remain adequately or well-capitalized, as defined in the OTS prompt corrective action regulations, following the proposed distribution; and  
  •   The distribution does not exceed our net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid).  

If we do not meet the above-stated requirements, we must obtain the prior approval of the OTS before declaring any proposed distributions. The OTS can prohibit a proposed capital distribution by a savings institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. We have never paid a dividend; instead earnings are reinvested in the bank to support our current growth rate.
 
Regulation of First Community Bank of America
 
Capital Requirements. Both OTS and FDIC have promulgated regulations setting forth capital requirements applicable to depository institutions. 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.  
Our tangible capital, core capital, and risk-based capital ratios at December 31, 2004, were 7.79%, 7.79%, and 11.10%, respectively.
 
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 OTS 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 OTS 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 OTS capital regulation based on the risks OTS 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.
 

At December 31, 2004, we met each of our capital requirements. See Note 11 to the consolidated financial statements for a summary of the regulatory capital levels and percentages.
 
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 OTS 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 OTS 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 OTS 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 is the administrator for the Savings Institution Insurance Fund (“SAIF”) and the Bank Insurance Fund (“BIF”), and independently establishes insurance premiums for each Fund. Our deposit accounts are insured by the SAIF which is also administered by the FDIC. The Federal Deposit Insurance Act requires that the reserves of the SAIF and the BIF to be 1.25% of total insured deposits. Both funds are fully funded.
 
The FDIC applies a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. In accordance with its rule, the FDIC assigns a depository institution to one of three capital categories based on the institution’s financial information, as of the reporting period ending seven months before the assessment period. A depository institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. There are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied.
 
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 s loans upon which we focus. As of December 31, 2004, we exceeded the QTL test, maintaining approximately 95% 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 OTS authority preempts any state law purporting to regulate branching by federal savings institutions. Prior approval of the OTS 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 OTS 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”) 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.
 
OTS Assessments. Savings institutions are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. 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.
 
Federal Home Loan Bank System. We are a member of the Federal Home Loan Bank 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, we are 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, 2004, dividends paid by the FHLB-Atlanta to First Community Bank amounted to approximately $30,000, at a yield of 3.78% of our pre-tax income. 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.
 
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 OTS.
 

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.
 
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.
 
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.
 
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 internal control compliance reporting for non-accelerated filers such as First Community has been extended to the first fiscal year ending on or after July 15, 2006.