Business Context and Reporting Period
Company: First Community Corporation (FCCO)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: A South Carolina-based bank holding company operating First Community Bank, N.A. The company serves small-to-medium-sized businesses and individuals primarily in Lexington, Richland, Kershaw, and Newberry Counties. It operates 11 full-service offices and offers traditional banking, mortgage, brokerage, and insurance services.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Assets | $599.0 million | $605.8 million |
| Total Loans | $329.9 million | $344.2 million |
| Total Deposits | $455.3 million | $449.6 million |
| Net Interest Income | $18.1 million | $17.9 million |
| Net Income (GAAP) | $1.9 million | ($25.2 million) loss |
| Net Income Available to Common Shareholders | $1.2 million | ($25.9 million) loss |
| Diluted EPS | $0.36 | ($7.95) |
| Net Interest Margin | 3.26% | 3.10% |
| Return on Average Assets | 0.20% | (3.90%) |
| Allowance for Loan Losses | $4.9 million (1.49% of loans) | $4.9 million (1.41% of loans) |
| Non-Performing Assets | $13.2 million (2.20% of assets) | $8.3 million (1.38% of assets) |
| Total Shareholders' Equity | $41.8 million | $41.4 million |
Material Changes vs. Prior Period
- Return to Profitability: The company returned to profitability in 2010 with net income of $1.9 million, reversing a $25.2 million net loss in 2009. The 2009 loss was primarily driven by a non-cash goodwill impairment charge of $27.8 million.
- Asset Quality Deterioration: Non-performing assets increased significantly from 1.38% of total assets in 2009 to 2.20% in 2010. Non-accrual loans rose to $5.9 million from $4.1 million.
- Loan Portfolio Contraction: Total loans decreased by $14.2 million (4.1%) due to weak loan demand and scheduled paydowns, despite funding over $44.7 million in new production.
- Investment Portfolio Restructuring: The company reclassified all held-to-maturity securities to available-for-sale in Q4 2010. It also sold non-agency mortgage-backed securities (MBS) to reduce exposure to downgraded assets, realizing a net gain of approximately $30,000 on subsequent sales in early 2011.
- Expense Management: Operating non-interest expense increased to $17.7 million in 2010 from $16.6 million in 2009, driven by higher salaries and benefits ($680k increase) and other real estate expenses ($622k increase).
Guidance, Outlook, Risks, and Contingencies
- Regulatory Status: The bank remains "well capitalized" and exceeds the individual minimum capital ratios established by the Office of the Comptroller of the Currency (OCC) under a Formal Agreement entered in April 2010. The agreement was triggered by downgrades in non-agency MBS holdings.
- Dividend Restrictions: The bank is currently prohibited from paying cash dividends to the holding company without prior OCC approval. The holding company requires Federal Reserve preapproval to pay dividends.
- Capital Requirements: The company holds Series T Preferred Stock issued under the TARP Capital Purchase Program. Dividends on this stock are 5% for the first five years but will increase to 9% in 2014 if not redeemed. Redemption is subject to regulatory consent.
- Key Risks:
- Credit Risk: High concentration in commercial real estate (66.2% of loans) and exposure to the local South Carolina economy.
- Investment Risk: Continued volatility in private label MBS and potential for further other-than-temporary impairment (OTTI) charges.
- Regulatory Risk: Compliance with the Formal Agreement and potential impacts of the Dodd-Frank Act on deposit insurance assessments and interchange fees.
- Outlook: Management anticipates remaining well-capitalized for the next 12 months. Loan growth remains constrained by the economic recovery, and the company is focused on core deposit growth and liquidity management.
Investor Verification Checklist
- Regulatory Compliance: Verify continued compliance with the OCC Formal Agreement and the status of the bank's "well capitalized" designation.
- Asset Quality Trends: Monitor the trajectory of non-performing assets and the adequacy of the allowance for loan losses given the 66% concentration in commercial real estate.
- Investment Portfolio: Review the remaining exposure to private label MBS and the potential for future OTTI charges or unrealized losses.
- Dividend Policy: Confirm the timeline for lifting dividend restrictions and the strategy for redeeming the Series T Preferred Stock before the dividend rate increases to 9% in 2014.
- Liquidity Position: Assess the stability of core deposits versus brokered deposits (which were eliminated in 2010) and reliance on FHLB advances.