FCCO

Business Context and Reporting Period

Company: First Community Corporation (South Carolina)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter and nine months ended September 30, 2005

Overview: The company operates as a community bank deriving income primarily from interest on loans and investments. The reported results reflect the full impact of the merger with DutchFork Bancshares, which closed on October 1, 2004. Consequently, the 2005 figures are not directly comparable to the 2004 figures on a standalone basis due to the inclusion of the acquired entity's operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net income increased 66% year-over-year for the nine-month period ($2.24M vs $1.35M), driven primarily by the DutchFork merger and organic growth. Average earning assets grew from $208.5M in 2004 to $390.4M in 2005.
• Margin Compression: Net interest margin declined from 3.97% (9M 2004) to 3.30% (9M 2005). This was caused by a 78 basis point increase in the cost of interest-bearing liabilities (1.47% to 2.25%) outpacing the 19 basis point increase in yield on earning assets (5.13% to 5.32%).
• Expense Increase: Total non-interest expense rose significantly ($8.57M vs $5.21M for 9M) due to the addition of three new branches and approximately 32 employees from the merger, plus two de-novo branch openings. Salaries and benefits increased by $1.9M.
• Asset Quality: Non-performing assets totaled $709,000 (0.15% of total assets) at September 30, 2005, up from $132,000 in the prior year. Net charge-offs were $266,000 for the nine months ended September 30, 2005, compared to $17,000 in the prior year.
• Capital Position: Shareholders' equity increased slightly to $50.9M. Risk-based capital ratios remained well above regulatory requirements (Tier 1: 11.8%, Total Capital: 12.7%).

Guidance, Outlook, and Risks

• Strategic Focus: Management intends to continue growing the loan portfolio as a percentage of earning assets to improve yields, leveraging cash flow from a restructured investment portfolio. The loan-to-deposit ratio increased to 62.8% from 55.4%.
• Market Risk Management: The company maintains a slight asset-sensitive position. To mitigate rising rate risks, the company entered into a $10 million interest rate cap agreement (4.50% cap, 3-month LIBOR) expiring in 2009. Simulation modeling indicates a 100 basis point rate increase would result in a 0.59% increase in net interest income over the next 12 months.
• Significant Contract: A construction contract was signed in June 2005 for a new 27,000 sq. ft. administrative center with an estimated total cost of $4.3 million.
• Accounting Changes: The company is preparing for the adoption of SFAS No. 123(R) regarding share-based payments, effective in 2006, which is estimated to reduce net income by approximately $80,000 in 2006.
• Risks: Key risks include competitive pressure, integration challenges from the merger, interest rate volatility, and potential deterioration in credit quality due to economic conditions.

Investor Verification Checklist

• Merger Integration: Verify the extent to which the 2005 results are driven by the DutchFork acquisition versus organic growth, noting the lack of comparability to 2004.
• Net Interest Margin Trend: Monitor the widening cost of funds (2.25% cost of liabilities) and its impact on future profitability if rates continue to rise.
• Asset Quality: Review the increase in non-performing assets and net charge-offs ($266k) to ensure the allowance for loan losses ($2.7M, 1.29% of loans) remains adequate.
• Capital Ratios: Confirm that risk-based capital ratios remain compliant with OCC and Federal Reserve guidelines as the company expands its loan portfolio.
• Unrealized Losses: Note the unrealized loss on available-for-sale securities increased to $2.78M, reflecting the impact of rising interest rates on the investment portfolio.