Business Context and Reporting Period
Company: First Community Corporation (First Community Bank, NA)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2007
Overview: The Company is a South Carolina-based bank holding company. Operations are driven by net interest income from loans and investments funded primarily by deposits. The Company completed a merger with DeKalb Bankshares, Inc. in June 2006, integrating The Bank of Camden into its operations.
Key Financial Metrics
| Metric | Nine Months Ended Sept 30, 2007 |
Nine Months Ended Sept 30, 2006 |
Three Months Ended Sept 30, 2007 |
Three Months Ended Sept 30, 2006 |
|---|---|---|---|---|
| Net Income | $2,766,762 | $2,640,513 | $1,148,096 | $902,906 |
| Diluted EPS | $0.84 | $0.84 | $0.35 | $0.27 |
| Net Interest Income | $11,285,345 | $10,548,040 | $3,908,994 | $3,750,622 |
| Net Interest Margin (FTE) | 3.30% | 3.36% | 3.29% | 3.36% |
| Total Assets | $577,750,789 | $548,055,743 (Dec 31, 2006) | N/A | |
| Total Loans (Gross) | $302,828,777 | $275,188,567 (Dec 31, 2006) | N/A | |
| Total Deposits | $413,300,978 | $414,941,407 (Dec 31, 2006) | N/A | |
| Allowance for Loan Losses | $3,525,495 | $3,214,624 (Dec 31, 2006) | N/A | |
| Shareholders' Equity | $64,171,663 | $63,207,651 (Dec 31, 2006) | N/A |
Material Changes vs. Prior Period
- Profitability: Net income increased 4.8% for the nine-month period and 27.2% for the quarter compared to the prior year, driven by higher net interest income and non-interest income.
- Asset Growth: Total assets increased $29.7 million (5.4%) from year-end 2006. Loans grew $27.6 million, funded by the maturity and sale of investment securities and increased borrowings.
- Net Interest Margin (NIM): NIM declined slightly to 3.22% (3.30% FTE) for the nine months ended Sept 30, 2007, from 3.27% (3.36% FTE) in 2006. This was due to a 57 basis point increase in the cost of interest-bearing liabilities outpacing a 38 basis point increase in yield on earning assets.
- Cost of Funds: The cost of time deposits rose significantly to 4.76% from 4.03% in the prior year period, reflecting an inverted yield curve and competitive deposit pricing.
- Non-Interest Income: Increased $252,000 for the nine-month period, primarily due to higher deposit service charges ($197,000 increase) and gains on sale of securities ($74,000 gain vs. $69,000 loss prior year).
- Non-Interest Expense: Increased $854,000 (8.7%) for the nine-month period. Drivers included hiring retail bankers, consulting fees for process efficiency, occupancy costs from a new administrative office, and a new television advertising campaign.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The Company adopted SFAS No. 159 (Fair Value Option) effective January 1, 2007. This resulted in a $559,678 cumulative adjustment reducing retained earnings and reclassifying certain structured corporate bonds to "trading" status to manage interest rate volatility.
- Asset Mix Strategy: Management intends to continue shifting the asset mix toward higher-yielding loans (currently 60.5% of earning assets) and away from investments, despite associated credit and liquidity risks.
- Liquidity: Liquidity is considered adequate. The Company maintains a stable core deposit base and access to Federal Home Loan Bank (FHLB) lines of credit. A $20 million leverage transaction was executed to fund investment securities.
- Capital: The Company remains "well-capitalized." Tier 1 risk-based capital ratio was 13.8% and total risk-based capital was 14.7% at Sept 30, 2007, well above regulatory minimums.
- Risks: Key risks include interest rate volatility (liability sensitive within one year), competitive pressure on deposit pricing, credit quality deterioration, and regional economic conditions. The Company utilizes interest rate caps and floors to mitigate rate risk.
- Unusual Items: A $159,000 gain on early extinguishment of debt occurred in the prior year (2006) which did not recur in 2007. Consulting expenses incurred in early 2007 for efficiency studies are not expected to impact the remainder of the year.
Investor Verification Checklist
- Deposit Stability: Verify the trend in NOW and money market accounts, which decreased $28.0 million from year-end 2006, and assess the sustainability of time deposit growth.
- Loan Quality: Review the allowance for loan losses coverage ratio (303% of non-performing loans) and monitor the $1.16 million in non-performing assets (up from $147k in 2006) for potential future charge-offs.
- Expense Run-Rate: Confirm if the increased marketing and consulting expenses are one-time or recurring, as they significantly impacted the 2007 expense ratio.
- Interest Rate Sensitivity: Assess the impact of the liability-sensitive gap position on net interest income if interest rates decline further, as modeled in the sensitivity analysis.
- Share Repurchases: Note the active share repurchase program; 22,000 shares were bought in Q3 2007, with 25,387 shares remaining under the authorized plan.