Business Context and Reporting Period
Company: First Community Corporation (FCCO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: A bank holding company incorporated in South Carolina, operating primarily through its subsidiary, First Community Bank, N.A. The company provides traditional banking products, including commercial and consumer loans, mortgages, and investment services, across 12 offices in South Carolina.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 | Dec 31, 2010 |
|---|---|---|---|
| Net Income | $570 | $589 | - |
| Net Income Available to Common | $403 | $423 | - |
| Diluted EPS | $0.12 | $0.13 | - |
| Total Assets | $607,314 | - | $599,023 |
| Total Loans (Gross) | $334,156 | $342,203 | $329,954 |
| Total Deposits | $465,983 | - | $455,344 |
| Net Interest Income | $4,454 | $4,707 | - |
| Net Interest Margin (Taxable Equivalent) | 3.30% | 3.46% | - |
| Provision for Loan Losses | $360 | $550 | - |
| Allowance for Loan Losses | $4,655 | - | $4,911 |
| Non-Performing Assets | $13,115 | $9,063 | $13,200 |
| Shareholders' Equity | $42,515 | - | $41,797 |
Material Changes vs. Prior Period
- Net Income: Decreased slightly by $19,000 (3.2%) compared to Q1 2010, driven by a $537,000 increase in non-interest expenses, partially offset by reduced other-than-temporary impairment (OTTI) charges and favorable fair value adjustments on interest rate swaps.
- Net Interest Income: Declined by $253,000 (5.4%) due to a 16 basis point decrease in net interest margin (from 3.46% to 3.30%) and a reduction in average earning assets.
- Non-Interest Income: Increased significantly by $605,000 (73.6%) to $1.4 million, primarily due to a $134,000 gain on the sale of securities and a reduction in OTTI write-downs compared to the prior year.
- Non-Interest Expense: Rose by $537,000 (12.8%) to $4.7 million. Key drivers included increased salaries and benefits ($186,000), higher FDIC assessments ($51,000), and increased marketing expenses ($80,000).
- Asset Quality: Non-performing assets remained relatively stable at $13.1 million (2.16% of total assets) compared to $13.2 million at year-end 2010. Impaired loans decreased to $8.1 million from $9.6 million at year-end 2010.
Guidance, Outlook, and Risks
- Regulatory Compliance: The Bank is subject to a Formal Agreement with the Office of the Comptroller of the Currency (OCC) regarding downgraded non-agency mortgage-backed securities (MBS). The Bank must maintain specific 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 and "well capitalized."
- Investment Portfolio Strategy: The Company sold ten non-agency MBS totaling approximately $26.0 million in Q1 2011 to reduce exposure to below-investment-grade securities. Proceeds were reinvested in lower-risk securities to improve regulatory capital ratios.
- Capital Outlook: Management anticipates remaining "well capitalized" for the next 12 months. However, restrictions exist on paying dividends to the holding company until OCC approval is obtained.
- Risk Factors:
- Credit Risk: High concentration of real estate loans (66.7% of portfolio) exposes the company to declining property values and economic downturns.
- Interest Rate Risk: The company is currently liability-sensitive within one year. A 200 basis point decrease in rates could reduce net interest income by 13.54%.
- Regulatory Changes: Implementation of the Dodd-Frank Act and Basel III capital standards may increase compliance costs and capital requirements.
Investor Verification Checklist
- Regulatory Capital Ratios: Verify the Bank's continued compliance with the specific minimum capital ratios mandated by the OCC under the Formal Agreement.
- Non-Agency MBS Exposure: Confirm the remaining balance and credit quality of the private label mortgage-backed securities portfolio, which remains a primary regulatory concern.
- Allowance Adequacy: Assess the sufficiency of the $4.66 million allowance for loan losses given the high concentration of commercial real estate loans and the economic environment.
- Dividend Restrictions: Monitor the status of the Formal Agreement and OCC approvals required for the Bank to pay dividends to the holding company, which impacts the ability to pay common dividends.
- Non-Performing Asset Trends: Track the resolution of the $13.1 million in non-performing assets, particularly the $7.9 million in other real estate owned (OREO).