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, 2009
Business Overview: A South Carolina-based bank holding company deriving income primarily from interest on loans and investments, funded by deposits. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Income (Loss) | $986,000 | $(2,359,000) |
| Diluted EPS | $0.20 | $(0.74) |
| Net Interest Income | $8,632,000 | $8,474,000 |
| Net Interest Margin (FTE) | 3.06% | 3.31% |
| Provision for Loan Losses | $1,392,000 | $364,000 |
| Total Assets | $650.7 million | $601.1 million (Average) |
| Total Deposits | $433.6 million | $423.8 million (Dec 31, 2008) |
| Allowance for Loan Losses | $4.1 million (1.25% of loans) | $4.6 million (Dec 31, 2008) |
| Non-Performing Assets | $7.5 million (1.15% of assets) | $1.6 million (Dec 31, 2008) |
| Cash Flow from Operations | $5.1 million | $2.4 million |
Material Changes vs. Prior Period
- Profitability Turnaround: The company returned to profitability ($986k net income) compared to a significant loss ($2.4M) in the prior year. The 2008 loss was primarily driven by a $6.2 million other-than-temporary impairment (OTTI) charge on a Freddie Mac preferred stock investment. In 2009, OTTI charges were significantly lower at $742,000.
- Asset Quality Deterioration: Non-performing assets increased sharply from $1.6 million (0.24% of assets) at June 30, 2008, to $7.5 million (1.15% of assets) at June 30, 2009. This included a rise in nonaccrual loans to $6.4 million.
- Provision Increase: The provision for loan losses increased to $1.4 million from $364,000 in the prior year, reflecting the economic downturn and rising delinquencies in the real estate portfolio.
- Expense Growth: Non-interest expenses rose 13.8% to $8.5 million. Key drivers included a $577,000 increase in FDIC insurance assessments (including a special one-time assessment) and higher legal fees related to loan workouts.
- Margin Compression: The net interest margin (taxable-equivalent basis) declined 25 basis points to 3.06% due to lower yields on earning assets (5.48% vs 6.25%) outpacing the reduction in the cost of funds.
Outlook, Risks, and Management Commentary
- Capital Position: The company remains "well-capitalized" under regulatory guidelines. Tier 1 risk-based capital ratio was 11.9% at the holding company level. The company participated in the Treasury's Capital Purchase Program (CPP), issuing $11.35 million in Series T Preferred Stock.
- Liquidity: Liquidity is deemed adequate, supported by a stable core deposit base and liquid investment securities representing 26.4% of total assets. The company holds $23 million in brokered CDs obtained in 2008 to fund a leverage strategy.
- Investment Portfolio Risks: Management continues to monitor private label mortgage-backed securities (MBS) and corporate bonds. While unrealized losses exist, management asserts the intent and ability to hold these securities to maturity or recovery, not considering them other-than-temporarily impaired (except for specific write-downs taken).
- Forward-Looking Risks: Significant risks include further deterioration in real estate values, increased unemployment, and the potential for higher credit losses. The company notes that the allowance for loan losses is a critical accounting estimate subject to judgment regarding future economic conditions.
- Regulatory Environment: The company faces increased FDIC assessments and is subject to restrictions on dividends and stock repurchases due to its participation in the CPP.
Investor Verification Checklist
- Allowance Adequacy: Verify if the $4.1 million allowance (1.25% of loans) is sufficient given the rapid increase in non-performing assets to $7.5 million and the concentration of commercial real estate loans (61.3% of portfolio).
- Investment Portfolio Valuation: Review the specific assumptions used for the $12 million in unrealized losses on held-to-maturity non-agency MBS and the $2.7 million in unrealized losses on corporate bonds to assess potential future OTTI charges.
- FDIC Assessment Impact: Confirm the timing and total cost of the special one-time FDIC assessment ($500k) and projected rates for the remainder of 2009 (15-18 basis points).
- Non-Performing Loan Trends: Monitor the two specific large non-accrual loans ($2.5M and $1.5M) and the $1.1M in potential problem loans to gauge future charge-off risks.
- Capital Restrictions: Note the restrictions on common stock dividends (capped at $0.08/share) and repurchases until the Series T Preferred Stock is redeemed or transferred.