First Community Corporation (FCCO)

Executive Summary / Key Takeaways

• Strategic Inflection via Acquisition: The pending Signature Bank of Georgia merger ($41.6M, Q1 2026 close) represents FCCO's bold entry into the Atlanta MSA, adding a high-performing SBA platform and projected 4.4% EPS accretion in year one, but introduces integration risks that could strain management and margins.

• Operational Excellence at Scale: Despite sub-$2.5B assets, FCCO delivers a best-in-class 12.21% ROE and expanding net interest margin (3.26% in Q3), driven by disciplined loan growth and deposit franchise strength, though a -36% PVE sensitivity in a down 400bp scenario exposes structural interest rate risk.

• Segment-Level Growth Engines: Mortgage Banking (+94% pre-tax income) and Investment Advisory (+37% pre-tax income, $1.1B AUM) are outpacing core commercial banking, diversifying revenue and offsetting margin pressure, but require continued investment to sustain momentum.

• Capital Allocation Pivot: The new $7.5M buyback plan (5% of equity) and 2.09% dividend yield signal management's confidence in capital generation, yet the all-stock merger structure suggests preservation of cash for integration and technology investments.

• Critical Variables: The thesis hinges on (1) successful merger integration without deposit/customer attrition, and (2) maintaining superior ROE while closing technology gaps with larger peers like SouthState and United Community Banks .

Setting the Scene: The Community Bank Dilemma

First Community Corporation, founded in 1994 and headquartered in Lexington, South Carolina, operates as a classic community bank holding company with 21 branches concentrated in underserved South Carolina counties. The company generates revenue through two primary channels: net interest income from traditional lending and deposit-gathering, and non-interest income from mortgage banking and investment advisory services. This business model thrives on local relationship banking, where deep community ties translate into stable, low-cost deposits and disciplined loan underwriting.

The regional banking industry presents a structural paradox for players of FCCO's size. On one side, scale advantages favor larger competitors like SouthState Corporation and United Community Banks , who can spread technology and compliance costs across broader asset bases while offering sophisticated digital platforms. On the other side, community banks face relentless pressure from fintech firms and national banks offering higher deposit rates and streamlined digital experiences. FCCO occupies a precarious middle ground: too small to compete on technology, yet too large to ignore the strategic imperative of growth.

The company's core strategy has historically emphasized operational efficiency over geographic sprawl, focusing on counties where it can achieve meaningful market share and pricing power. This approach yielded superior returns—FCCO's 12.21% ROE significantly exceeds the 7.66% posted by similarly-positioned Southern First Bancshares and the 9.32% from SouthState. However, the pending Signature Bank acquisition signals a deliberate pivot, trading pure-play community banking for regional scale and product diversification.

Industry dynamics amplify the urgency of this strategic shift. The Federal Reserve's rate-cutting cycle, which began in September 2024, has compressed net interest margins industry-wide, while the proposed rescission of the 2023 Community Reinvestment Act modernization rule could alter compliance costs. Meanwhile, digital transformation has become table stakes, with customers expecting mobile-first experiences that smaller banks struggle to deliver profitably. FCCO's response—combining sophisticated risk management with selective M&A—reflects management's recognition that standing pat risks slow marginalization.

History as Strategic Foundation

FCCO's evolution from a pure-play South Carolina lender to a regional consolidator follows a pattern of deliberate, risk-aware expansion. The 2004 issuance of $15.5 million in trust preferred securities provided early growth capital, while the 2015 partial redemption demonstrated balance sheet discipline. More telling are recent moves: the June 2022 reclassification of $224.5 million in investments from available-for-sale to held-to-maturity was a proactive response to rising rates, shielding equity from mark-to-market volatility. This wasn't merely accounting maneuvering—it signaled management's willingness to sacrifice liquidity flexibility to protect capital ratios, a trade-off that preserved the bank's ability to lend through the rate cycle.

The May 2023 initiation of a $150 million pay-fixed/receive-floating swap on fixed-rate loans converted synthetic floating-rate exposure, hedging against further rate increases while maintaining loan competitiveness. This level of derivatives sophistication is unusual for a bank of FCCO's size and reflects a treasury function that punches above its weight. The subsequent April 2025 $19.8 million investment swap extended this hedging strategy to the securities portfolio, creating a more resilient balance sheet in anticipation of rate volatility.

These historical moves establish a pattern: FCCO's management anticipates risks rather than reacts to them. This capability becomes critical as the bank absorbs Signature Bank's operations, where integration missteps could unravel years of careful risk management.

Technology and Product Differentiation: The SBA Moat

FCCO lacks proprietary technology platforms, but the Signature acquisition brings a specialized Small Business Administration lending capability that represents a genuine product moat. Signature's SBA platform isn't merely a loan product—it's a relationship-driven, high-margin business that leverages local market knowledge to underwrite complex commercial credits larger banks avoid. SBA lending generates fee income and yields that exceed conventional commercial loans while carrying government guarantees that reduce capital requirements.

The strategic rationale, articulated by CEO Michael Crapps, centers on building upon Signature's "well-established and high-performing SBA lending platform" and extending it across FCCO's legacy footprint. This cross-selling opportunity could transform the combined bank's commercial banking segment from a spread-based business into a fee-generating operation less sensitive to interest rate cycles. The risk lies in execution: SBA lending requires specialized underwriting expertise and regulatory navigation that could be disrupted during integration.

Technology gaps remain FCCO's primary competitive vulnerability. The bank's digital capabilities lag peers like United Community Banks, whose mobile app offers notably faster processing and more intuitive user experiences. This directly impacts deposit retention as younger demographics migrate to fintech alternatives. The 6.3% growth in "pure deposits" (non-CD deposits) demonstrates FCCO's current customer loyalty, but this moat erodes without digital investment. The merger's success depends partly on whether FCCO can leverage Signature's technology infrastructure to accelerate its own digital roadmap.

Financial Performance: Evidence of Strategic Execution

FCCO's Q3 2025 results provide compelling evidence that the core community banking model remains viable when executed with discipline. Net interest income surged $2.6 million (19.3%) to $16 million, driven by a $138.5 million increase in average earning assets and a 31 basis point NIM expansion to 3.26%. This margin improvement is particularly significant because it occurred during a rate-cutting environment, suggesting FCCO's asset-liability management actively optimized deposit costs and loan yields rather than passively riding the cycle.

The segment breakdown reveals a deliberate diversification strategy. Commercial and Retail Banking, the core segment, delivered solid 15.8% pre-tax income growth, but Mortgage Banking's 94.4% surge to $1.3 million and Investment Advisory's 37.2% increase to $734,000 demonstrate successful fee-income expansion. Mortgage Banking's performance wasn't just volume-driven—secondary market production rose 62% while gain-on-sale margins held at 2.91%, indicating pricing discipline in a competitive market. Investment Advisory assets under management reached $1.1 billion, with $12 million in net new assets during Q3 alone, showing the wealth management business is gaining traction.

These figures reduce FCCO's dependence on spread income, making the bank more resilient to margin compression. The 9.1% increase in non-interest income to $4.5 million offset some of the $1.7 million rise in non-interest expense, which included $575,000 in merger costs. Excluding these one-time expenses, the efficiency ratio would have improved, validating management's ability to control costs while investing in growth.

The balance sheet tells a story of disciplined expansion. Total assets grew 5.5% year-to-date to $2.1 billion, funded by a 5.7% increase in deposits. Critically, pure deposits grew 6.3% while brokered CDs dropped to zero, reducing funding costs and regulatory scrutiny. The loan portfolio expanded $58.8 million with no deterioration in credit quality, and the provision for credit losses increased modestly to $201,000, reflecting growth rather than stress. This demonstrates FCCO is growing without sacrificing underwriting standards—a key risk during acquisitions.

Outlook and Guidance: The Integration Imperative

Management's guidance for the Signature merger projects 4.4% EPS accretion in 2026, a tangible target that anchors the investment thesis. The all-stock transaction, valued at $41.6 million based on FCCO's $24.84 share price, preserves cash for integration while issuing shares that will dilute existing ownership by approximately 5%—roughly offset by the concurrent $7.5 million buyback authorization. This capital allocation dance signals management's confidence in generating sufficient earnings to make the dilution temporary.

The timeline—financial close in early Q1 2026, operational conversion later in Q1 or early Q2—creates a narrow window for execution. Management commentary emphasizes cultural alignment and Signature's "deep local relationships," but history shows community bank mergers often stumble on systems integration and customer retention. The 2.6% tangible book value dilution with a 2.2-year earnback period is reasonable for a strategic acquisition, but only if revenue synergies materialize. The primary synergy—cross-selling SBA lending across FCCO's footprint—requires retaining Signature's specialized lenders and maintaining their production capacity through the conversion.

Macro assumptions embedded in the guidance appear conservative. The 4.4% accretion likely assumes continued Fed rate cuts and stable credit markets, but doesn't appear to bake in significant revenue upside from SBA expansion. This suggests management is under-promising, creating potential for positive surprises if integration goes smoothly. Conversely, any deposit attrition or key employee departures could erode the accretion quickly, given the thin margin for error in a $41.6 million deal.

Risks: Threats to the Core Thesis

The most material risk isn't merger integration—it's FCCO's interest rate sensitivity. The Present Value of Equity analysis shows a -36.18% decline in a down 400 basis point scenario, breaching the bank's -25% policy limit. This exposes a structural vulnerability: FCCO's balance sheet is asset-sensitive in a way that could devastate equity value if rates fall faster than expected. The pay-fixed swaps hedge some of this exposure, but the magnitude of the PVE shortfall suggests the hedging program is incomplete or the loan portfolio's duration is longer than disclosed. For investors, this means the strong ROE performance could reverse dramatically in a protracted low-rate environment, undermining the investment case regardless of merger success.

Real estate concentration presents a second, correlated risk. With 91.6% of loans collateralized by real estate and non-owner occupied CRE at 304% of risk-based capital, FCCO is vulnerable to a regional property downturn. While South Carolina and Georgia markets have remained resilient, a recession-induced commercial real estate correction could trigger credit losses that overwhelm the modest $201,000 quarterly provision. The risk is amplified post-merger, as Signature's Atlanta-focused portfolio may have different risk characteristics than FCCO's rural South Carolina book.

Technology risk compounds these balance sheet concerns. FCCO's digital capabilities lag peers, creating deposit flight risk as customers demand modern banking experiences. The merger provides an opportunity to upgrade systems, but integration disruptions could temporarily worsen the digital gap, accelerating attrition among younger, more profitable customers. The deposit franchise value underpins the entire community bank model—lose the low-cost deposit base, and the NIM expansion story collapses.

Competitive Context: Punching Above Its Weight

FCCO's 12.21% ROE stands out in a peer group where Southern First (SFST) manages 7.66%, SouthState (SSB) achieves 9.32%, and United Community Banks (UCBI) delivers 9.2%. This outperformance stems from superior asset utilization and cost discipline, not leverage—FCCO's 0.93% ROA exceeds Southern First's 0.61% and approaches United Community's 1.0%. The implication is clear: FCCO generates more profit per dollar of assets than most peers, suggesting either better pricing power or lower operating costs.

However, this efficiency comes at the cost of growth and scale. SouthState's $66 billion asset base and United Community's $28 billion provide funding cost advantages and technology investment capacity that FCCO cannot match. SouthState's recent acquisition of Independent Bank Group (IBTX) expanded its Texas footprint, while United Community's digital upgrades position it to capture younger demographics. FCCO's response—the Signature acquisition—adds only $300 million in assets, insufficient to close the scale gap but large enough to strain management bandwidth.

The competitive moat lies in FCCO's local brand strength and relationship banking model, which yields deposit costs materially below regional averages. This advantage is defensible in rural and suburban markets where personal service matters more than app features, but erodes in urban areas like Atlanta where Signature operates. The merger's success depends on whether FCCO can transplant its community banking culture into a more competitive metro market without sacrificing the efficiency that drives its ROE premium.

Valuation Context: Reasonable Premium for Quality

At $30.65 per share, FCCO trades at 12.77 times trailing earnings, a modest discount to Southern First's 17.02x but a premium to Bank of South Carolina (BKSC)'s 11.34x. The 1.46 price-to-book ratio sits above SouthState's 1.08x and United Community's 1.10x, reflecting the market's recognition of FCCO's superior returns on equity. The 2.09% dividend yield, supported by a conservative 25.4% payout ratio, provides income while management reinvests the remaining earnings into growth.

Cash flow multiples tell a more nuanced story. The 21.98x price-to-free-cash-flow ratio exceeds peers, suggesting the market is pricing in continued earnings growth from the merger. However, the 20.39x price-to-operating-cash-flow ratio is more reasonable, indicating the premium is tied to future synergies rather than current cash generation. The $159.1 million enterprise value represents 2.27x revenue, in line with regional bank multiples but below the 3.36x price-to-sales ratio, which reflects the company's strong margin profile.

The valuation leaves limited room for execution missteps. If merger integration costs exceed the projected $575,000 quarterly run-rate or if deposit attrition erodes the 4.4% accretion target, the stock could re-rate toward book value, representing a 25% downside. Conversely, successful SBA platform expansion could justify a premium multiple as revenue diversifies away from spread income.

Conclusion: The Merger Makes or Breaks the Story

First Community Corporation's investment thesis centers on a single question: can a well-run community bank execute a regional acquisition without sacrificing the operational excellence that defines its moat? The evidence from Q3 2025 is encouraging—superior ROE, expanding NIM, and successful fee-income diversification demonstrate management's capability. The Signature merger offers a compelling strategic rationale, adding Atlanta exposure and SBA expertise that could transform FCCO's growth trajectory.

However, the risks are material and directly tied to the thesis. The -36% PVE sensitivity in a down-rate scenario threatens profitability regardless of merger success, while technology gaps expose the deposit franchise to attrition. Integration risks are real, and the modest scale of the acquisition may not provide sufficient buffer to absorb execution missteps.

The two variables that will decide this thesis are merger integration quality and interest rate risk management. If FCCO retains Signature's talent and customers while maintaining its own efficiency ratios, the 4.4% EPS accretion could prove conservative, justifying current valuation. If integration stumbles or rates fall faster than hedged, the stock's premium could evaporate quickly. For investors, this is a high-conviction bet on management's execution ability in an industry where most small-bank acquisitions disappoint.