Executive Summary / Key Takeaways

• First Community Corporation demonstrated solid financial performance in Q1 2025, with net income increasing significantly year-over-year, driven by robust net interest income growth and improved non-interest income.
• The company's net interest margin expanded substantially, benefiting from growth in higher-yielding loans and strategic management of interest-bearing liabilities despite a dynamic rate environment.
• FCCO maintains a strong focus on core relationship-based deposits ("pure deposits") and local market lending, which serves as a key competitive differentiator against larger, more technologically focused institutions.
• While facing competitive pressures and risks inherent in real estate concentrations and interest rate sensitivity, the company's strong capital position and proactive risk management framework appear adequate to support continued operations and strategic initiatives.
• Positive analyst sentiment and earnings growth projections suggest a favorable near-term outlook, although execution risks and broader economic conditions warrant careful monitoring.

A Community Banking Foundation in the Southeast

First Community Corporation operates as a dedicated community bank deeply rooted in the southeastern United States. Its core business revolves around providing essential deposit and lending products and services tailored to the needs of commercial and retail customers within its localized markets. This relationship-centric approach forms the bedrock of FCCO's strategy, emphasizing personalized service and deep understanding of the local economic landscape.

In the broader competitive arena, FCCO operates alongside a diverse set of financial institutions. This includes large regional banks like Truist Financial Corporation (TFC) and Fifth Third Bancorp (FITB), which possess significant scale, extensive branch networks, and substantial technological resources. It also competes with more specialized lenders such as 1st Franklin Financial Corporation (FFC), particularly in the consumer finance space.

FCCO's competitive positioning is defined by its strengths and vulnerabilities relative to these rivals. Its primary competitive advantages lie in its established community brand and local network. This fosters strong customer loyalty, particularly in less urbanized areas, translating into stable deposit bases and recurring revenue streams. The company's deep local ties also inform its credit underwriting, potentially contributing to lower default rates in its core commercial loan portfolio compared to institutions relying solely on standardized, remote assessments. Furthermore, its regulatory licenses provide exclusive access to operate within its defined regional footprint, acting as a barrier to entry for some potential competitors.

However, FCCO's smaller scale relative to large regional banks presents certain disadvantages, notably higher operating costs per unit due to less extensive economies of scale. Additionally, while the company is investing in technology, it faces a technological gap compared to rivals like TFC and FITB, who leverage advanced digital platforms for faster processing and enhanced efficiency. This can make FCCO vulnerable in segments where digital convenience is paramount.

The company's strategy is to leverage its local expertise and relationship model to drive quality loan growth and gather low-cost "pure deposits" (demand, interest-bearing transaction, savings, money market, and IRAs). This focus aims to manage its overall cost of funds effectively. While it operates across multiple segments, the Commercial and Retail Banking segment remains the primary engine of the business, contributing the vast majority of assets and net interest income.

Operational Pillars and Technological Investments

FCCO's operations are structured around four reportable segments: Commercial and Retail Banking, Mortgage Banking, Investment advisory and non-deposit, and Corporate. The Commercial and Retail Banking segment is the largest, focusing on traditional banking services. The Mortgage Banking segment is involved in originating loans for both the secondary market and the held-for-investment portfolio, including residential construction loans. The Investment advisory and non-deposit segment provides wealth management and non-banking financial services, offering diversification to the income stream. The Corporate segment handles parent company financials.

In the first quarter of 2025, the Commercial and Retail Banking segment reported net interest income of $13.2 million and net income of $2.9 million, representing growth of 15.0% and 26.1%, respectively, compared to Q1 2024. The Mortgage Banking segment saw significant year-over-year growth, with net interest income increasing by 61.1% to $1.4 million and net income surging by 229.4% to $1.1 million, primarily driven by higher secondary market loan production. The Investment advisory segment also contributed positively, with noninterest income rising 32.9% to $1.8 million and net income growing 48.8% to $0.6 million.

While specific proprietary technological differentiators akin to a unique manufacturing process are not detailed, the company's financial statements indicate ongoing investment in technology crucial for modern banking operations. Increases in non-interest expenses related to "core banking and electronic processing and services," "ATM/debit card processing," and "software subscriptions and services" point to strategic efforts to enhance operational efficiency and customer experience through digital channels and updated systems. These investments are essential for FCCO to remain competitive, enabling faster transaction processing, improved online and mobile banking capabilities, and more streamlined internal workflows. Although specific quantifiable benefits like percentage improvements in processing speed or cost reduction metrics are not disclosed, the strategic intent is clear: to leverage technology to support customer activity, improve service delivery, and potentially reduce manual processes over time, thereby addressing some of the scale disadvantages relative to larger, more technologically advanced competitors. The increase in technology-related expenses suggests a commitment to maintaining relevant digital capabilities in a banking environment increasingly shaped by technological innovation.

Financial Performance: A Story of Growth and Margin Expansion

FCCO's financial performance in the first quarter of 2025 demonstrated notable improvement. Net income rose to $4.0 million, a significant increase of $1.4 million compared to $2.6 million in the first quarter of 2024. This growth was primarily fueled by a $2.3 million increase in net interest income, which reached $14.4 million, up 19.2% year-over-year.

The improvement in net interest income was a direct result of both asset growth and margin expansion. Average earning assets increased by $126 million, reaching $1.90 billion in Q1 2025. Simultaneously, the net interest margin improved by 34 basis points to 3.12%. This margin expansion was driven by a favorable shift in the mix of earning assets towards higher-yielding loans and short-term investments, coupled with an increase in the yield earned on the loan portfolio. The yield on loans increased by 27 basis points to 5.71% in Q1 2025. While the yield on the overall securities portfolio declined, the strategic decision to hold excess liquidity in higher-yielding interest-bearing deposits at the Federal Reserve Bank contributed positively to overall earning asset yields.

On the liability side, the cost of interest-bearing liabilities decreased to 2.58% in Q1 2025 from 2.88% in Q1 2024. The overall cost of funds, including demand deposits, also declined. This was achieved despite an increase in certificates of deposit, reflecting the company's success in growing lower-cost "pure deposits," which increased by $38.6 million (11.4% annualized) to $1.41 billion at March 31, 2025. Brokered certificates of deposit, used to supplement funding, decreased significantly year-over-year, standing at $10.4 million at March 31, 2025, compared to $60.6 million a year prior.

Non-interest income also contributed to the positive results, increasing by $798,000 to $4.0 million. This was largely attributable to a $334,000 increase in mortgage banking income and a $448,000 rise in investment advisory fees and non-deposit commissions. The growth in mortgage banking income reflects higher secondary market loan production, while the increase in investment advisory fees occurred despite a decrease in total assets under management between year-end 2024 and Q1 2025, indicating positive net new asset inflows during the quarter.

Total non-interest expense increased by $949,000 to $12.8 million, primarily due to higher salaries and employee benefits (driven by normal adjustments, increased commissions, and incentive accruals), as well as increases in equipment, FDIC insurance assessments, and various other operating expenses including technology-related costs and legal/professional fees.

Total assets grew by $81.4 million (16.8% annualized) in the first quarter, reaching $2.04 billion at March 31, 2025. This growth was primarily driven by increases in interest-bearing bank balances (reflecting the temporary liquidity strategy) and loans held-for-investment, which increased by $31.4 million (10.4% annualized) to $1.25 billion. The loan-to-deposit ratio remained stable at approximately 73%.

Managing Risk in a Dynamic Environment

As a financial institution, FCCO is exposed to various risks, including credit risk, interest rate risk, and liquidity risk. Credit risk is inherent in the loan portfolio, a significant portion of which (approximately 91% at March 31, 2025) is collateralized by real estate. While real estate collateral provides a secondary source of repayment, the company's concentration in non-owner occupied commercial real estate loans (308% of total risk-based capital) and construction and land development loans (80% of total risk-based capital) represents a notable exposure. Management emphasizes its expertise, long history, strong underwriting processes, and rigorous monitoring and stress testing of these portfolios to mitigate this risk. Credit quality metrics in Q1 2025 showed a slight decrease in non-performing assets as a percentage of total assets (0.03% vs. 0.04% at year-end 2024) and a decline in the ratio of classified assets to regulatory capital. However, loans past due 30 days or more increased as a percentage of the total loan portfolio (0.14% vs. 0.05%), and loans delinquent 30-89 days also saw a significant increase, warranting close attention. The allowance for credit losses on loans increased, driven by loan growth and a modest increase in qualitative factors, standing at 1.09% of total loans at March 31, 2025.

Interest rate risk is managed by the Asset/Liability Committee (ALCO) through monitoring interest sensitivity gap and performing simulation modeling. The company was liability sensitive for net interest income at March 31, 2025, meaning that rising interest rates are projected to negatively impact net interest income in the near term (e.g., a 100 basis point increase is modeled to decrease NII by 2.84% in the first 12 months). This sensitivity increased compared to the prior year, partly due to adjustments in non-maturity deposit rate betas. However, the $150 million pay-fixed, receive-floating interest rate swap acts as a fair value hedge, converting fixed-rate loans to a synthetic floating rate and partially offsetting this liability sensitivity. Over a longer time horizon (measured by Present Value of Equity), the company was primarily asset sensitive, with PVE generally increasing in rising rate scenarios, although a severe 400 basis point shock is modeled to result in a 1.49% decline.

Liquidity appears robust. The company's primary funding sources are its customer deposits. It supplements this with borrowed funds, including securities sold under agreements to repurchase and access to Federal Home Loan Bank (FHLB) advances and Federal Reserve Discount Window lines. At March 31, 2025, FCCO had significant remaining credit availability from the FHLB ($489.3 million) and federal funds lines ($77.5 million), totaling over $576 million. This capacity comfortably exceeds total uninsured deposits (excluding secured/collateralized state/political subdivision deposits) of $479.7 million, indicating ample resources to meet potential deposit outflows or fund future growth.

Capital levels remain strong. The Bank meets all capital adequacy requirements under Basel III on a fully phased-in basis and is considered "well capitalized." This strong capital position provides a buffer against potential losses and supports future growth initiatives. The company's ability to pay dividends is subject to regulatory considerations and the Bank's performance, but the recent approval of a $0.15 per common share dividend for Q1 2025 reflects management's confidence in current profitability and capital levels. A share repurchase plan authorizing up to $7.1 million remains in place until May 2025, offering potential for capital deployment, though no repurchases have been made under this plan to date.

Outlook and Strategic Priorities

FCCO's outlook is shaped by its strategic focus on local market penetration, quality loan growth, and deposit gathering, alongside managing the inherent risks of the banking environment. The positive start to 2025, marked by strong net income growth and margin expansion, provides a solid foundation.

Management's stated goals include continuing to grow assets through quality loan origination within its service areas and focusing on increasing "pure deposits" to manage funding costs. The increase in loan production in Q1 2025 suggests progress on the asset growth front, while the growth in pure deposits indicates success in attracting core funding.

Analyst sentiment, as reflected in recent reports, appears positive, with Zacks Equity Research assigning favorable ratings (Buy/Strong Buy) and projecting significant year-over-year EPS growth for 2025 (estimates ranging from $2.28 to $2.35 per share). These projections imply expectations for continued earnings momentum throughout the year, likely driven by sustained net interest income performance and contributions from non-interest income segments.

However, the outlook is not without challenges. The competitive landscape, particularly the increasing efficiency and digital capabilities of larger regional banks and agile fintechs, requires FCCO to continue investing in its own technology and operational efficiency to maintain market share. The increase in 30-89 day past due loans in Q1 2025, while not yet impacting non-accrual levels significantly, bears watching as a potential indicator of future credit quality trends, especially given the concentrations in real estate lending. The liability sensitivity to rising rates, while partially hedged, could still pressure net interest income if interest rates were to increase unexpectedly.

Despite these risks, FCCO's strong capital base, ample liquidity, and demonstrated ability to grow core banking activities and diversify income streams through its mortgage and investment advisory segments position it to pursue its strategic objectives. The unutilized share repurchase authorization also offers potential flexibility in capital management.

Conclusion

First Community Corporation's first quarter 2025 results paint a picture of a community bank effectively leveraging its local strengths and strategic initiatives to drive growth and profitability in a complex financial environment. The significant increase in net income and expansion of the net interest margin underscore the positive impact of loan growth and disciplined liability management. While the company operates in a competitive landscape dominated by larger, more technologically advanced players, its focus on relationship banking and strategic investments in operational technology provide a crucial differentiation.

Key risks, particularly related to concentrations in commercial real estate lending and interest rate sensitivity, require ongoing vigilance. However, FCCO's robust capital and liquidity positions appear well-suited to absorb potential shocks and support its growth trajectory. The positive outlook reflected in analyst earnings projections suggests confidence in the company's ability to execute its strategy. For investors, FCCO represents an opportunity to invest in a well-capitalized community bank with a proven ability to generate earnings growth, supported by a stable deposit base and diversified income streams, while actively managing its risk exposures. The continued execution of its local-focused strategy and effective deployment of capital will be critical factors to monitor.