FCCO

Business Context and Reporting Period

Company: First Community Corporation (First Community Bank, NA)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three and six months ended June 30, 2007

Overview: The Company is a South Carolina-based bank holding company. Operations are primarily focused on lending and deposit gathering within its service area. The reporting period includes the impact of a merger with DeKalb Bankshares, Inc. completed in June 2006, and the early adoption of SFAS No. 159 (Fair Value Option) effective January 1, 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by approximately $119,000 (6.8%) for the six months ended June 30, 2007, compared to the same period in 2006. This was primarily driven by a $788,000 (12.4%) increase in non-interest expenses.
• Expense Increases: Non-interest expenses rose due to hiring additional retail bankers, a new television advertising campaign, consulting fees for process improvement, and occupancy costs associated with a new administrative office and the Camden branch.
• Asset Growth: Loans increased by $27.0 million (9.8%) from year-end 2006, funded by the maturity and sale of investment securities and increased borrowings. The loan-to-deposit ratio improved to 75.0% from 66.3%.
• Interest Rate Environment: The yield on earning assets increased by 48 basis points to 6.48%, while the cost of interest-bearing liabilities increased by 66 basis points to 3.76%, resulting in a slight compression of the net interest margin.
• Accounting Change: The Company adopted SFAS 159, reclassifying certain structured corporate bonds to "trading" status. This resulted in a cumulative adjustment reducing retained earnings by $559,678 as of January 1, 2007.

Guidance, Outlook, and Risks

• Strategic Focus: Management intends to continue shifting the asset mix toward higher-yielding loans and away from the investment portfolio. They anticipate advertising expenses will remain approximately 65% above prior year levels for the remainder of 2007.
• Capital Position: The Company is "well-capitalized" under regulatory guidelines. Tier 1 risk-based capital ratio was 12.5% and total risk-based capital was 13.5% at June 30, 2007.
• Market Risk: The Company is currently liability-sensitive within one year. Simulation modeling indicates that a 200 basis point increase in interest rates would decrease net interest income by 5.97% over the next twelve months.
• Key Risks: Risks include competitive pressure, changes in interest rates (inverted yield curve), deterioration in credit quality, and changes in deposit flows. The Company utilizes interest rate caps and floors to mitigate volatility.
• Stock Repurchases: The Board authorized a total of 200,000 shares for repurchase. As of June 30, 2007, 20,100 shares were repurchased in Q2, with 47,387 shares remaining available under the plan.

Investor Verification Checklist

• Expense Sustainability: Verify if the $788,000 increase in non-interest expenses (consulting, advertising, staffing) is a one-time occurrence or a permanent step-up in the cost structure.
• Loan Quality Trends: Monitor the allowance for loan losses (1.13% of total loans) against the rise in non-performing assets, which increased to $1.034 million from $73,000 in the prior year period.
• Deposit Stability: Assess the impact of the 87 basis point increase in the cost of time deposits on future margins, given that 85% of time deposits reprice within 12 months.
• Accounting Impact: Review the ongoing volatility in earnings caused by the fair value option (SFAS 159) on trading securities and derivatives.
• Liquidity Sources: Confirm reliance on core deposits versus borrowed funds (FHLB advances increased significantly to $41.5 million).