Business Context and Reporting Period
Company: First Community Corporation (FCCO)
Reporting Period: Fiscal year ended December 31, 2008
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 12 full-service offices and offers traditional banking, mortgage, brokerage, and insurance services. In September 2008, the company acquired two financial planning firms to expand its investment advisory capabilities.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Income (Loss) | $(6.8) million | $4.0 million |
| Net Interest Income | $17.2 million | $15.3 million |
| Non-Interest Income (Loss) | $(10.1) million | $5.0 million |
| Provision for Loan Losses | $2.1 million | $0.5 million |
| Total Assets | $650.2 million | $565.6 million |
| Total Loans | $333.0 million | $310.0 million |
| Total Deposits | $423.8 million | $405.9 million |
| Shareholders' Equity | $68.2 million | $64.0 million |
| Net Interest Margin | 3.16% | 3.21% |
| Return on Average Assets | (1.10%) | 0.72% |
| Return on Average Equity | (10.89%) | 6.24% |
Capital Ratios (Company): Tier 1 Risk-Based Capital: 12.58%; Total Risk-Based Capital: 13.73%; Leverage Ratio: 8.28%. The bank is classified as "well-capitalized."
Material Changes vs. Prior Period
- Net Loss: The company reported a net loss of $6.8 million in 2008, a reversal from the $4.0 million net income in 2007. This was primarily driven by a $14.5 million Other-Than-Temporary Impairment (OTTI) charge on Freddie Mac preferred stock and a $0.6 million loss on fair value adjustments of interest rate contracts.
- Non-Interest Income: Turned negative at $(10.1) million due to the OTTI charge, compared to $5.0 million in 2007. Operating non-interest income (excluding OTTI) was $4.4 million.
- Provision for Loan Losses: Increased significantly to $2.1 million from $0.5 million in 2007, reflecting deteriorating economic conditions and rising delinquencies.
- Asset Growth: Total assets grew 15% to $650.2 million, driven by a $63.2 million leverage strategy involving non-agency Mortgage-Backed Securities (MBS) and Commercial Mortgage-Backed Securities (CMOs), funded by Federal Home Loan Bank advances and brokered CDs.
- Capital Injection: In November 2008, the company participated in the Treasury's Capital Purchase Program (CPP), issuing Series T Preferred Stock and a warrant for $11.35 million in cash.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The $14.5 million OTTI charge on Freddie Mac preferred stock was the primary driver of the 2008 loss. Management also recognized a $0.6 million loss on an interest rate swap and a $0.4 million loss on a limited partnership interest related to low-income housing.
- Outlook: Management anticipates continued economic weakness in the local market, leading to higher delinquencies and problem loans. They expect to fund provisions for loan losses at levels higher than historically experienced.
- Risks:
- Credit Risk: High concentration in commercial real estate (43.3% of total loans) and real estate-secured loans (89.2% of total loans). Non-performing assets rose to $2.5 million (39 basis points of assets) from $1.2 million in 2007.
- Investment Portfolio: Significant exposure to private-label MBS/CMOs and corporate bonds with unrealized losses. Management asserts intent and ability to hold these to maturity, but further OTTI charges are possible if credit quality deteriorates.
- Liquidity and Funding: Reliance on brokered deposits (approx. 5% of total) and FHLB advances. Increased FDIC insurance assessments are expected in 2009.
- Regulatory Constraints: Participation in the CPP imposes restrictions on executive compensation and dividend increases until November 2011.
- Management Commentary: Despite the net loss, "operating earnings" (excluding non-operating items) were $3.1 million. Management remains committed to growing the loan portfolio to leverage the new capital, targeting a 10x to 12x leverage ratio over time.
Investor Verification Checklist
- OTTI Assessment: Verify the methodology used to determine that remaining unrealized losses on private-label MBS and corporate bonds are not "other-than-temporary," given the widening spreads and downgrades.
- Commercial Real Estate Exposure: Review the specific underwriting standards and collateral values for the $144.3 million commercial real estate loan portfolio, which represents a significant concentration risk.
- Non-Performing Assets: Monitor the trend of non-performing assets, which nearly doubled in 2008, and the adequacy of the allowance for loan losses (1.38% of total loans).
- CPP Terms: Confirm the impact of the Series T Preferred Stock dividend requirements (5% initially, rising to 9% after five years) on future earnings per share and liquidity.
- FDIC Assessments: Estimate the impact of the proposed special FDIC assessment (up to 20 basis points) and increased risk-based premiums on 2009 profitability.