Business Context and Reporting Period
Company: First Community Corporation (FCCO), a South Carolina-based bank holding company operating primarily through First Community Bank, N.A.
Reporting Period: Quarterly report (Form 10-Q) for the period ended September 30, 2010.
Operations: The Company provides traditional banking products and services, including consumer and commercial loans, mortgage, brokerage, and investment services, through 11 full-service offices in South Carolina. The Company is subject to a formal written agreement with the Office of the Comptroller of the Currency (OCC) regarding capital ratios and investment portfolio management.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2010 | Three Months Ended Sep 30, 2010 |
|---|---|---|
| Net Income (Loss) | $1,457,000 | $394,000 |
| Net Income Available to Common Shareholders | $960,000 | $228,000 |
| Diluted EPS (Common) | $0.29 | $0.07 |
| Total Assets | $611,449,000 | $611,449,000 |
| Total Loans (Gross) | $329,713,000 | $329,713,000 |
| Total Deposits | $461,631,000 | $461,631,000 |
| Net Interest Income | $13,655,000 | $4,483,000 |
| Net Interest Margin (FTE) | 3.31% | 3.21% |
| Provision for Loan Losses | $1,365,000 | $235,000 |
| Allowance for Loan Losses | $4,841,000 | $4,841,000 |
| Non-Performing Assets | $13,365,000 (2.19% of assets) | $13,365,000 (2.19% of assets) |
| Shareholders' Equity | $43,889,000 | $43,889,000 |
Material Changes vs. Prior Period
- Profitability Turnaround: The Company reported a net income of $1.46 million for the nine months ended September 30, 2010, a significant improvement from a net loss of $26.1 million in the same period of 2009. The 2009 loss was primarily driven by a non-cash goodwill impairment charge of $27.8 million.
- Operating Income: Excluding the 2009 goodwill impairment, operating net income decreased slightly from $1.17 million in the prior year period to $960,000 in the current period.
- Net Interest Margin: Improved by 24 basis points to 3.31% (FTE) for the nine-month period, driven by a decrease in the cost of interest-bearing liabilities (down 68 basis points) which outpaced the decline in yield on earning assets.
- Asset Quality: Non-performing assets increased from $7.6 million (1.20% of assets) in the prior year period to $13.4 million (2.19% of assets), reflecting the economic downturn and increased delinquencies in real estate loans.
- Loan Portfolio: Total loans decreased by $14.5 million from year-end 2009 due to paydowns and transfers to Other Real Estate Owned (OREO), despite $32.5 million in new loan production.
- Investment Portfolio: The Company restructured its portfolio, selling a Collateralized Debt Obligation (CDO) and realizing a loss of $1.7 million, while selling agency securities for a gain of $1.7 million to reduce regulatory risk weighting.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Agreement: The Bank is subject to a formal written agreement with the OCC requiring minimum capital ratios (Tier 1 Leverage 8.00%, Tier 1 Risk-Based 10.00%, Total Risk-Based 12.00%). Management believes the Bank is currently in compliance.
- Dividend Restrictions: The OCC agreement prohibits the Bank from paying cash dividends to the holding company. Additionally, the Company requires Federal Reserve preapproval for dividends.
- Investment Risks: The Company holds non-agency mortgage-backed securities (PLMBS) and corporate bonds that have experienced downgrades and unrealized losses. Nine PLMBS were identified as other-than-temporarily impaired (OTTI) with credit losses recognized in earnings.
- Interest Rate Risk: The Company is currently liability-sensitive within one year. Management utilizes an interest rate swap ($10 million notional) to hedge against rising rates, which resulted in a fair value loss of $644,000 for the nine-month period.
- Legislative Impact: The Dodd-Frank Act and changes to Regulation E (overdraft fees) are expected to impact non-interest income and regulatory compliance costs in the future.
- Unusual Items: The 2009 goodwill impairment charge of $27.8 million is a non-recurring item that significantly distorted year-over-year comparisons. The Company also recorded OTTI charges of $799,000 in the current nine-month period.
Investor Verification Checklist
- Capital Compliance: Verify continued adherence to the specific capital ratios mandated by the OCC formal agreement.
- Asset Quality Trends: Monitor the trajectory of non-performing assets and the adequacy of the allowance for loan losses (currently 1.47% of total loans) given the high concentration of real estate loans.
- Investment Portfolio Valuation: Assess the potential for further OTTI charges on the remaining non-agency mortgage-backed securities and downgraded corporate bonds.
- Fee Income Sustainability: Evaluate the long-term impact of Regulation E changes on overdraft fee revenue and the Dodd-Frank Act on interchange fees.
- Liquidity Position: Confirm the stability of the core deposit base and the absence of brokered deposits, which supports the Company's liquidity strategy.