Business Context and Reporting Period
Company: First Community Corporation (First Community Bank, N.A.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A South Carolina-based bank holding company operating 11 full-service offices. The company provides traditional banking, mortgage, brokerage, and insurance services. During the quarter, the company completed the acquisition of two financial planning firms and implemented a leverage strategy involving non-agency mortgage-backed securities.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Net Income (Loss) | $(6,304,811) | $2,766,762 |
| Diluted EPS | $(1.97) | $0.84 |
| Net Interest Income | $12,910,081 | $11,285,345 |
| Net Interest Margin (FTE) | 3.27% | 3.30% |
| Total Assets | $633,669,691 | $565,612,800 (Dec 31, 2007) |
| Total Loans | $324,333,357 | $310,028,490 (Dec 31, 2007) |
| Total Deposits | $433,318,173 | $405,854,368 (Dec 31, 2007) |
| Shareholders' Equity | $56,819,626 | $63,995,620 (Dec 31, 2007) |
| Cash and Cash Equivalents | $17,587,473 | $20,898,382 (Sep 30, 2007) |
Material Changes vs. Prior Period
- Significant Loss: The company reported a net loss of $6.3 million for the nine months ended September 30, 2008, compared to net income of $2.8 million in the prior year. This reversal was primarily driven by a $14.3 million "other-than-temporary impairment" (OTTI) charge on a Freddie Mac preferred stock investment.
- Operating Earnings: Excluding the OTTI charge, operating earnings were $3.5 million ($1.09 per share) for the nine months ended September 30, 2008, an increase from $2.7 million ($0.82 per share) in the prior year.
- Asset Growth: Total assets increased by $68.3 million (12.1%) year-over-year, driven by a $14.3 million increase in loans and a strategic acquisition of $63.2 million in non-agency mortgage-backed securities and collateralized mortgage obligations (CMOs).
- Funding Strategy: To fund the leverage strategy, the company utilized $36.0 million in Federal Home Loan Bank (FHLB) advances and $23.0 million in brokered certificates of deposit, a shift from previous reliance on core deposits.
- Non-Interest Income: Reported non-interest income was a loss of $10.3 million due to the OTTI charge. Excluding this charge, non-interest income increased 14.2% to $4.0 million, aided by a 78.1% increase in mortgage origination fees.
Guidance, Outlook, and Risks
- Capital Purchase Program: On November 6, 2008, the company received preliminary approval to participate in the U.S. Treasury's Capital Purchase Program. The Treasury intends to purchase approximately $11.3 million of senior preferred stock. The company anticipates closing this transaction in 2008.
- OTTI Charge Details: The $14.3 million charge resulted from the Treasury placing Freddie Mac into conservatorship and suspending dividends on preferred shares. The company wrote down $6.2 million in Q2 and $8.1 million in Q3. Management believes the remaining carrying value is minimal ($3,000) but notes potential for recovery if dividends resume.
- Interest Rate Risk: The company is currently liability-sensitive within one year. Simulation modeling indicates that a 100 basis point increase in rates would decrease net interest income by 1.97%, while a 100 basis point decrease would increase it by 2.46%.
- Loan Quality: Non-performing assets totaled $2.04 million (0.32% of total assets). The allowance for loan losses was $3.66 million (1.13% of total loans). Net charge-offs increased to $589,000 for the nine-month period, primarily due to residential investment property loans.
- Regulatory Capital: As of September 30, 2008, the bank's Tier 1 risk-based capital ratio was 9.9% and total risk-based capital was 10.9%, both exceeding the "well-capitalized" thresholds of 6% and 10%, respectively.
Investor Verification Checklist
- OTTI Impact: Verify the remaining carrying value of the Freddie Mac preferred stock and the likelihood of dividend resumption.
- Leverage Strategy Risk: Assess the credit quality and liquidity of the $63.2 million non-agency mortgage-backed securities portfolio acquired in Q2.
- Capital Injection: Confirm the closing status and final terms of the Treasury Capital Purchase Program investment.
- Loan Portfolio Health: Monitor the trend of non-performing assets and the adequacy of the allowance for loan losses given the economic environment.
- FDIC Premiums: Review the impact of anticipated increases in FDIC insurance premiums for 2009 on future non-interest expenses.