Net income (loss) for the fourth quarter of 2008 was ($488) thousand and diluted earnings (loss) per common share were $(.17). Operating earnings for the year of 2008 were $3.1 million or $.98 per common share as compared to $3.9 million or $1.20 per common share in 2007. The primary reasons for this decrease are the same as the contributors to the fourth quarter loss as discussed below. For the year, the company reported a net loss of $6.8 million. As discussed in previous releases, the U.S. Treasury Department announced their decision to place the Federal Home Loan Corporation (commonly known as Freddie Mac) into conservatorship and to suspend cash dividends paid on its preferred stock. Due to this action and as previously announced, the company experienced an other than temporary impairment (OTTI) charge during the year in a total pre-tax amount of $14.3 million, with the after tax impact being $9.5 million. This action eliminated any remaining exposure to government sponsored enterprise (GSE) preferred securities.
Noteworthy in the fourth quarter were several items that contributed significantly to the loss. The company experienced an OTTI charge in the amount of $169 thousand. This charge was against a home equity mortgage backed security purchased in early 2005 and leaves the remaining value of the security in the portfolio at $536 thousand. The company also experienced a negative fair value adjustment of $788 thousand during the quarter. This reflects the adjustment in value of an interest rate swap executed early in the fourth quarter to reduce the company’s exposure to increasing interest rates. During the quarter, interest rates declined, thereby resulting in the negative fair value adjustment. As the swap approaches the expiration date in 2013, or earlier if rates increase, the company will recognize a full recovery of this fair value adjustment.
Additionally, the provision for loan losses in the quarter was $1.4 million as compared to $359 thousand in the prior quarter and $132 thousand in the fourth quarter of 2007. This results in a loan loss reserve of $4.6 million, which as a ratio to total loans is 1.38%, an increase from the prior quarter’s ratio of 1.13%. Mike Crapps, president and chief executive officer noted, We are not immune to the effects of a slowing economy and see some deterioration of our loan portfolio in general as evidenced by the increase in non-performing assets (NPAs) from $1.2 million (22 basis points) at December 31, 2007 to $2.5 million (39 basis points) at December 31, 2008. While these rates are favorable in comparison to current industry results, which we believe are in excess of 150 basis points, we are concerned about the impact of this economic environment on our customer base of local businesses and professionals. During this economic cycle acquisition and development (A&D) loans have been a major concern for financial institutions. Currently, our company has $13.2 million of A&D loans in our portfolio which represents only 3.9% of our total loan portfolio. Of these, we have identified a specific loan located within the Midlands of South Carolina in the amount of $3.2 million as a potential problem loan, although the loan was not yet 30 days delinquent at December 31, 2008. While we continue to work with the borrower, if this loan goes into non-performing status we believe it is not unreasonable to assume that as much as twenty percent of the loan amount could be charged off. Currently, the company does not anticipate any loss associated with the remaining A&D portfolio other than the specific loan referenced above.
Another significant factor in the quarter is continued compression of the net-interest margin (NIM). The interest margin was 3.05% during the quarter which is twelve basis points less than the prior quarter and twenty three basis points less than the fourth quarter of 2007. This contraction is driven by the rapid decline in interest rates quickly affecting asset yields while market rates on deposits have remained disproportionately high. Additionally, the net-interest margin was also affected by the addition of loans on non- accrual status. The related adjustments due to this factor impacted the net- interest margin for the quarter by approximately five basis points.
Non-interest expense was $4.2 million during the fourth quarter which represents a 9.5% ($368 thousand) increase over the prior quarter. This increase is primarily attributable to salaries and benefits for the employees of the newly acquired financial planning/investment advisory practices, marketing costs related to an initiative to speak to customers about the current economic environment, losses due to debit card fraud, and expenses related to the additional loan workouts and other real estate owned (OREO) issues.
As previously announced, on November 21, 2008, the company completed the sale of $11.4 million in preferred shares to the U.S. Treasury as part of the Capital Purchase Program. Crapps noted, While our company was well-capitalized prior to this transaction, this additional capital further strengthens our balance sheet and our capital structure. As of December 31, 2008, our Tier 1 capital ratio is 13.1%, over twice the regulatory guideline of 6.0% to be ‘well capitalized’, with $29.9 million in excess of the well capitalized regulatory requirement. The company’s Total capital ratio of 14.3% also exceeded the regulatory requirement of 10% needed to be considered ‘well capitalized’ with $17 million in excess of the regulatory requirement. In addition, at 8.2% the company’s Tier 1 leverage capital ratio was higher than the 5% required to be considered ‘well capitalized’ with $20.2 million in excess capital. Crapps remarked, It is an understatement to say that 2008 was a very challenging year for the company as well as the entire industry. All indications are that there will not be a rapid economic recovery and as a result 2009 will present many challenges. With our capital strength, core deposit base, and overall loan portfolio quality, we are well positioned to meet these challenges and to take advantage of the opportunities we see in the market. In fact, it is interesting to note that the company experienced solid loan growth in the fourth quarter, increasing the portfolio at an annualized rate of 7.0%. We continue to aggressively seek sound lending opportunities with our many qualified borrowers. As we move through this economic cycle, our efforts and focus will be to position the company to prosper and continue our long term goal of being the premier community bank in the markets we serve.
In addition to releasing year-end and fourth quarter results, the company also announced that the board of directors had approved a cash dividend for the fourth quarter of 2008. The company again declared a $.08 per share dividend, payable February 17, 2009 to shareholders of record as of February 2, 2009.
First Community Corporation stock trades on the NASDAQ Capital Market under the symbol FCCO and is the holding company for First Community Bank, a local community bank based in the midlands of South Carolina. First Community Bank operates eleven banking offices located in Lexington, Forest Acres, Irmo, Gilbert, Cayce – West Columbia, Chapin, Northeast Columbia, Newberry, Prosperity, Red Bank and Camden.