Business Context and Reporting Period
This Form 8-K filing by First Community Corporation (First Community) is dated September 7, 2008, with the report signed on September 10, 2008. The filing addresses a material impairment event triggered by the U.S. Treasury, Federal Reserve, and Federal Housing Finance Agency (FHFA) placing Freddie Mac under conservatorship on September 7, 2008.
Key Financial Metrics and Impairment Details
- Anticipated OTTI Charge: The Company expects to record an "Other Than Temporary Impairment" (OTTI) charge of approximately $8.2 million in the third quarter of 2008 related to Freddie Mac preferred stock.
- Prior Period Charge: A charge of $6.1 million was recorded in the second quarter of 2008 for the same investment.
- Dividend Impact: Dividends on Freddie Mac preferred securities have been eliminated. The Company received $292,000 pre-tax in dividends during the first six months of 2008.
- Earnings Per Share Impact: The elimination of dividends is estimated to reduce diluted earnings per share by approximately $0.04 per quarter ($0.16 annually) beginning in the third quarter of 2008.
- Cash Flow: The OTTI charge is non-cash and will not directly impact the Company's cash flow.
- Capital Ratios (Pro Forma): Even with a full write-off, as of August 31, 2008, the Company's pro forma ratios would remain above "well-capitalized" regulatory thresholds:
- Total Risk-Based Capital: 11.3% (Threshold: 10.0%)
- Tier 1 Risk-Based Capital: 10.4% (Threshold: 6.0%)
- Leverage Capital: 6.8% (Threshold: 5.0%)
Material Changes and Outlook
The primary material change is the anticipated $8.2 million impairment charge, which, combined with the Q2 charge, is expected to eliminate the Company's material exposure to Freddie Mac equity securities. Management states that the Company's business activity remains strong and capital levels exceed regulatory standards for being "well capitalized."
Regarding tax implications, the Company anticipates no immediate tax benefit from the OTTI charge because a future sale would likely result in a capital loss. Capital losses may be carried forward for five years to offset future capital gains.
Investor Verification Checklist
- Verify the exact timing and magnitude of the $8.2 million OTTI charge in the upcoming Q3 2008 earnings release.
- Confirm the cessation of dividend income from Freddie Mac preferred securities and its impact on quarterly earnings.
- Review the Company's updated capital ratios in the next regulatory filing to ensure they remain above the "well-capitalized" thresholds post-impairment.
- Monitor future tax filings for the utilization of capital loss carryforwards.