FCCO

Business Context and Reporting Period

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

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter and six months ended June 30, 2006

Overview: The Company is a South Carolina-based bank holding company. The reporting period was significantly impacted by the consummation of a merger with DeKalb Bancshares, Inc. on June 9, 2006, which added approximately $46.4 million in assets and $27.3 million in deposits. The Company is a non-accelerated filer.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net income increased 16.9% year-over-year for the six-month period, driven by a $368,000 increase in net interest income and a $909,000 increase in non-interest income.
• Asset Expansion: Total assets grew 15.1% from December 31, 2005, primarily due to the DeKalb merger. Loans increased by $40.4 million, with $13.8 million attributed to organic growth.
• Non-Interest Income: Significant increases were seen in deposit service charges (+$536,000) and commissions on non-deposit investment products (+$143,000). A $159,000 gain on the early extinguishment of debt offset a $69,000 loss on the sale of securities.
• Expense Increases: Total non-interest expense rose $698,000, largely due to a $350,000 increase in salaries and benefits and a $404,000 increase in other expenses (consulting, professional fees, and network upgrades).
• Interest Rates: The yield on earning assets increased to 6.00% (from 5.27%), while the cost of interest-bearing liabilities rose to 3.10% (from 2.12%), resulting in a slight compression of the net interest margin.

Guidance, Outlook, and Risks

• Merger Integration: Management anticipates cost savings and revenue synergies from the DeKalb merger but notes risks regarding successful integration and timing.
• Capital Outlook: The Company expects to remain a "well-capitalized" institution. The effective tax rate is projected to remain between 30.0% and 32.0% for the remainder of 2006.
• Strategic Focus: The Company intends to continue shifting its asset mix toward higher-yielding loans rather than investment securities, while maintaining asset quality.
• Market Risk: The Company is currently liability-sensitive within one year. It utilizes an interest rate cap agreement (notional amount $10.0 million) to hedge against rising rates. Simulation modeling indicates a potential decrease in net interest income of 1.47% if rates rise 100 basis points.
• Key Risks: Risks include integration challenges, competitive pressure, interest rate volatility, credit quality deterioration, and regulatory changes.

Investor Verification Checklist

• Merger Accounting: Verify the fair value adjustments and goodwill recognition ($4.9 million) associated with the DeKalb Bancshares acquisition.
• Loan Quality: Review the composition of the $2.4 million in loans delinquent 30-89 days and the adequacy of the allowance for loan losses relative to the expanded portfolio.
• Non-Interest Expense Sustainability: Assess whether the increase in professional fees and consulting costs is temporary (merger-related) or indicative of a permanent step-up in operating costs.
• Interest Rate Sensitivity: Evaluate the impact of the liability-sensitive gap position on future earnings if interest rates continue to rise.
• Stock-Based Compensation: Confirm the impact of the adoption of SFAS 123(R) on future earnings, noting that no cost was recognized in the current period as options had vested prior to adoption.