First Community Bank entered into a formal written agreement with the Office of the Comptroller of the Currency earlier this month related to mortgage-backed securities held in the institution’s investment portfolio.
The April 6 agreement is based on the findings of the OCC during a 2009 on-site examination of the Lexington-based bank, according to information filed with the US Securities and Exchange Commission.
The OCC’s primary concern with the bank is driven by the rating agencies’ downgrades of non-agency mortgage-backed securities, or MBS, in its investment portfolio, parent company First Community Corp. reported.
“These securities, purchased in 2004 through 2008, were all rated AAA by the rating agencies at the time of purchase; however, they have been impacted by the economic recession and the stress on the residential housing sector,” the company announced.
“The non-agency MBS ratings do not reflect the discounted purchase price paid by the bank. They only reflect the rating agencies’ analysis of the performance of the security overall and, therefore, a downgrade does not capture the risk of loss to the bank,” it added.
In the agreement, the OCC asked that the bank obtain an independent evaluation of its non-agency MBS, which it did in earlier this year, First Community announced.
The bank’s internal analysis identified an “other-than-temporary impairment” charge to earnings of $75,000 on the non-agency mortgage-backed securities during the first quarter of 2010.
The independent valuation indicated that no additional adjustments would be required in this quarter.
“The remainder of the agreement requires revisions to existing policies, plans, and procedures,” according to the filing. “These include the strategic plan, the capital plan, the investment policy, the liquidity policy, loan portfolio management systems, the allowance for loan and lease loss program, and certain appraisal documentation practices. Many of these revisions have already been completed.”
First Community’s board has appointed a compliance committee to monitor and coordinate the bank’s performance under the agreement.
The company added that the agreement does not require any adjustment to the bank’s balance sheet or income statement, nor does it change the bank’s “well-capitalized” status.
Stock in First Community is trading for around $6.50 a share.