Business Context and Reporting Period
Company: First Community Corporation (FCCO)
Reporting Period: Fiscal year ended December 31, 2009
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 in the Midlands of South Carolina (Lexington, Richland, Kershaw, and Newberry Counties) through 12 full-service offices. The company is a participant in the Treasury's Capital Purchase Program (CPP).
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Income (Loss) | $(25.2) million | $(6.8) million |
| Net Interest Income | $17.9 million | $17.2 million |
| Net Interest Margin | 3.10% | 3.16% |
| Provision for Loan Losses | $3.1 million | $2.1 million |
| Total Assets | $605.8 million | $650.2 million |
| Total Loans | $344.2 million | $333.0 million |
| Total Deposits | $449.6 million | $423.8 million |
| Shareholders' Equity | $41.4 million | $68.2 million |
| Non-Performing Assets | 1.38% of Total Assets | 0.39% of Total Assets |
| Tier 1 Leverage Ratio | 8.41% | 8.28% |
Material Changes vs. Prior Period
- Significant Net Loss: The company reported a net loss of $25.2 million in 2009, compared to a loss of $6.8 million in 2008. This deterioration was primarily driven by a non-cash goodwill impairment charge of $27.8 million recognized in the third quarter of 2009.
- Asset Quality Deterioration: Non-performing assets increased significantly from $2.5 million (0.39% of assets) in 2008 to $8.3 million (1.38% of assets) in 2009. Non-accrual loans rose from $1.8 million to $4.1 million.
- Loan Loss Provision: The provision for loan losses increased to $3.1 million in 2009 from $2.1 million in 2008, reflecting the economic downturn and increased delinquencies in the commercial real estate portfolio.
- Operating Performance: Excluding the goodwill impairment, "operating earnings" were $2.5 million in 2009, down from $2.9 million in 2008. Net interest income increased slightly due to higher average earning assets, though the net interest margin compressed slightly.
- FDIC Assessments: Non-interest expenses increased due to a substantial rise in FDIC insurance premiums, including a one-time special assessment and a requirement to prepay assessments for 2010-2012.
Guidance, Outlook, Risks, and Unusual Items
- Goodwill Impairment: The $27.8 million charge was a non-cash item resulting from the decline in market capitalization and acquisition multiples since the company's 2004 and 2006 acquisitions. It had no impact on regulatory capital or liquidity.
- Investment Portfolio Risks: The company holds private label mortgage-backed securities (PLMBS) and corporate debt. In 2009, 19 PLMBS CUSIPs were downgraded below investment grade. The company recognized $1.0 million in OTTI charges on securities in 2009. Management monitors these closely but believes it has the intent and ability to hold them to maturity.
- Commercial Real Estate Concentration: Approximately 62.2% of the loan portfolio consists of commercial real estate loans. A downturn in this sector poses a significant risk to asset quality and earnings.
- Regulatory Capital: The bank remains "well capitalized" under regulatory guidelines. However, discussions with the OCC suggest the bank may be required to maintain capital ratios in excess of minimum thresholds in 2010.
- Dividend Restrictions: Due to the net loss and retained earnings deficit, the bank is currently unable to pay dividends to the holding company without prior OCC approval. Additionally, the CPP agreement restricts increases in common stock dividends without Treasury consent until November 2011.
- Outlook: Management anticipates continued higher provisions for loan losses and elevated FDIC assessments in 2010 due to the ongoing recessionary environment.
Investor Verification Checklist
- Goodwill Impairment Impact: Verify the non-cash nature of the $27.8 million charge and its exclusion from regulatory capital calculations.
- Asset Quality Trends: Monitor the trajectory of non-performing assets and the adequacy of the allowance for loan losses (currently 1.41% of total loans) given the high concentration in commercial real estate.
- Investment Portfolio Valuation: Review the status of the private label mortgage-backed securities (PLMBS) portfolio, specifically the 19 downgraded CUSIPs, for potential future OTTI charges.
- Liquidity and Capital: Confirm the bank's ability to maintain "well capitalized" status under potential stricter OCC requirements and the impact of the CPP preferred stock dividend obligations (5% rising to 9% in 2014).
- FDIC Prepayments: Assess the impact of the $3.0 million prepaid FDIC assessments on short-term liquidity and future expense recognition.