Business Context and Reporting Period
Company: First Community Corporation (First Community Bank, N.A.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: A South Carolina-based bank holding company deriving income primarily from interest on loans and investments, funded by deposits. 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 (in thousands) | Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
Three Months Ended June 30, 2010 |
Three Months Ended June 30, 2009 |
|---|---|---|---|---|
| Net Income | $1,064 | $986 | $475 | $414 |
| Net Income Available to Common | $732 | $658 | $309 | $249 |
| Diluted EPS (Common) | $0.23 | $0.20 | $0.10 | $0.08 |
| Net Interest Income | $9,172 | $8,632 | $4,465 | $4,322 |
| Net Interest Margin (FTE) | 3.36% | 3.06% | 3.25% | 3.04% |
| Provision for Loan Losses | $1,130 | $1,392 | $580 | $941 |
| Total Assets (Period End) | $607,079 | $605,827 | N/A | |
| Total Loans (Period End) | $337,507 | $344,187 | N/A | |
| Allowance for Loan Losses | $4,838 | $4,854 | N/A | |
| Non-Performing Assets | $11,609 | $7,508 | N/A | |
| Cash & Cash Equivalents | $38,113 | $31,894 | N/A |
Material Changes vs. Prior Period
- Profitability: Net income increased 7.9% year-over-year for the six-month period, driven by a 30 basis point improvement in net interest margin and a $262,000 reduction in the provision for loan losses.
- Asset Quality: Non-performing assets (NPAs) increased significantly from $7.5 million (1.15% of total assets) in 2009 to $11.6 million (1.91% of total assets) in 2010. This includes a rise in foreclosed real estate (Other Real Estate Owned) from $1.1 million to $4.7 million.
- Investment Portfolio: The company restructured its investment portfolio, selling a Collateralized Debt Obligation (CDO) for a $1.7 million loss and selling $41.0 million in GSE bonds/MBS for a $1.7 million gain. The portfolio was shifted toward lower regulatory risk-weighted assets (GNMA, SBA pools).
- Non-Interest Income: Decreased from $2.6 million to $1.8 million (six months), primarily due to lower deposit service charges, reduced mortgage origination fees, and fair value losses on interest rate swaps.
- Non-Interest Expense: Decreased slightly by $62,000 year-over-year, largely due to a reduction in FDIC assessments compared to the special assessment levied in 2009.
Guidance, Outlook, Risks, and Contingencies
- Regulatory Agreement: On April 6, 2010, the Bank entered a formal written agreement with the OCC. The regulator's primary concern is the downgrade of non-agency mortgage-backed securities (MBS) in the investment portfolio. The agreement mandates minimum capital ratios: Tier 1 leverage of 8.00%, Tier 1 risk-based of 10.00%, and Total risk-based of 12.00%. Management states the Bank currently exceeds these ratios.
- Dividend Restrictions: The OCC agreement prohibits the Bank from paying cash dividends to the holding company. Additionally, the holding company requires Federal Reserve preapproval for dividends.
- Interest Rate Risk: The company is slightly liability-sensitive within one year. Simulation modeling indicates a 2.80% increase in net interest income if rates rise 100 basis points, and a 1.81% decrease if rates fall 100 basis points.
- Investment Risks: Significant exposure to private label mortgage-backed securities (PLMBS) and corporate bonds. While management intends to hold impaired securities to maturity, there is risk regarding further deterioration in credit quality and collateral values.
- Legislative Impact: The Dodd-Frank Act and changes to Regulation E (overdraft protection opt-in) are expected to impact fee income and compliance costs in the future.
Investor Verification Checklist
- OCC Compliance: Verify continued adherence to the specific capital ratio requirements (Tier 1 Leverage 8%, Tier 1 Risk-Based 10%, Total Risk-Based 12%) mandated by the April 2010 agreement.
- Asset Quality Trends: Monitor the trajectory of Non-Performing Assets (currently 1.91% of total assets) and the valuation of Other Real Estate Owned ($4.7 million), which has grown significantly.
- Investment Portfolio Valuation: Review the fair value and credit status of the $53.0 million private label mortgage-backed securities portfolio and the $7.2 million corporate bond portfolio, specifically those rated below investment grade.
- Liquidity Position: Confirm the repayment of the remaining $4.9 million in brokered certificates of deposit anticipated in Q3 2010.
- Fee Income Sensitivity: Assess the impact of the new Regulation E opt-in rules on overdraft protection fee revenue.