FCCO

Business Context and Reporting Period

Company: First Community Corporation (FCCO)
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: A South Carolina-based bank holding company operating First Community Bank, N.A. The company focuses on commercial and retail banking for small-to-medium businesses and individuals in the Midlands of South Carolina (Lexington, Richland, Kershaw, and Newberry counties).
Key Developments: Completed the acquisition of DeKalb Bankshares, Inc. (The Bank of Camden) in June 2006, adding one branch. The company also completed construction of a new 28,000-square-foot administrative center in Lexington in July 2006.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net income increased 13.2% to $3.50 million, driven primarily by a $44.0 million increase in average earning assets. Net interest income rose to $14.32 million.
• Margin Compression: Net interest margin decreased slightly from 3.30% to 3.27%. This was caused by a 97 basis point increase in the cost of interest-bearing liabilities (driven by higher time deposit rates) outpacing the 80 basis point increase in yields on earning assets.
• Expense Increases: Non-interest expense rose to $13.24 million from $11.84 million. Increases were attributed to salaries (new hires for DeKalb integration), occupancy (new administrative center and Camden branch), and professional fees (implementation of an overdraft protection program and Sarbanes-Oxley compliance).
• Asset Quality: Non-accrual loans increased to $449,000 from $101,000. Net charge-offs were $334,000, with a notable 186% increase in charge-offs for installment and credit card loans due to the new overdraft protection program.
• Capitalization: Shareholders' equity grew to $63.21 million, bolstered by retained earnings, stock issued in the DeKalb acquisition, and a recovery in the unrealized loss on available-for-sale securities.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates continued growth in the loan portfolio and core deposits. The company expects to remain "well capitalized" for at least the next 12 months.
• Interest Rate Risk: The company is liability-sensitive in the short term. Modeling indicates that a 100 basis point increase in rates would decrease net interest income by 1.19%, while a 100 basis point decrease would decrease it by 0.79%.
• Key Risks:
  • Concentration Risk: 88.1% of the loan portfolio is secured by real estate. Significant concentrations exist in residential and non-residential property lessors.
  • Unseasoned Portfolio: Rapid growth and recent acquisitions mean a portion of the loan portfolio is unseasoned, potentially leading to higher future delinquencies.
  • Regulatory Compliance: Ongoing costs associated with Sarbanes-Oxley Section 404 implementation.
• Unusual Items:
  • Accounting Firm Change: Dismissed Clifton D. Bodiford, CPA, and engaged Elliott Davis, LLC in May 2006. No disagreements were reported.
  • Overdraft Program: Introduction of a formalized overdraft privilege program in late 2005 led to higher service charges but also higher consumer loan charge-offs in 2006.

Investor Verification Checklist

• Loan Portfolio Quality: Verify the trend in non-accrual loans and the adequacy of the allowance for loan losses given the 186% spike in consumer charge-offs.
• Integration Synergies: Assess whether the DeKalb Bankshares acquisition is delivering expected cost savings and revenue synergies as integration continues.
• Interest Rate Sensitivity: Monitor the impact of rising interest rates on the cost of time deposits, which repriced significantly in 2006.
• Real Estate Exposure: Evaluate the health of the local South Carolina real estate market, given that nearly 90% of loans are real estate-secured.
• Capital Ratios: Confirm the company maintains its "well capitalized" status under Prompt Corrective Action regulations.