First Community Corporation — FY2019 Form 10-K Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company for First Community Bank, serving small and midsize businesses, professionals and individuals through 21 full-service offices in South Carolina and Georgia. The filing covers the fiscal year ended December 31, 2019, with comparative results for 2018 and 2017. The company had approximately $1.2 billion in assets, 242 full-time employees and 7.44 million common shares outstanding at year-end.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets | $1.170 billion | $1.092 billion | +7.2% |
| Loans | $737.0 million | $718.5 million | +2.6% |
| Deposits | $988.2 million | $925.5 million | +6.8% |
| Shareholders’ equity | $120.2 million | $112.5 million | +6.8% |
| Net interest income | $36.8 million | $35.7 million | +3.1% |
| Non-interest income | $11.7 million | $10.6 million | +10.3% |
| Net income | $11.0 million | $11.2 million | -2.3% |
| Diluted EPS | $1.45 | $1.45 | Flat |
| Net interest margin, tax equivalent | 3.65% | 3.69% | -4 bps |
| Return on average assets | 0.98% | 1.04% | -6 bps |
| Return on average common equity | 9.38% | 10.48% | -110 bps |
| Efficiency ratio | 70.52% | 68.06% | Higher costs |
Net interest income benefited from higher average earning assets and loan growth, but margin pressure resulted from higher funding costs, Federal Reserve rate cuts and a flat-to-inverted yield curve. The provision for loan losses declined to $139,000 from $346,000. Non-interest expense increased 7.8% to $34.6 million, principally due to personnel, occupancy, technology and strategic growth investments.
Fourth-quarter 2019 net income was $2.7 million, or $0.36 diluted EPS, compared with $2.7 million, or $0.35 diluted EPS, in fourth-quarter 2018. Fourth-quarter income included a $282,000 write-down of premises held for sale.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $5.0 million, down from $20.2 million in 2018.
- Investing activities used $49.2 million, primarily reflecting net purchases of investment securities and loan growth.
- Financing activities provided $59.6 million, primarily from $62.7 million of deposit growth.
- Cash and cash equivalents increased to $47.7 million from $32.3 million.
- Year-end loan-to-deposit ratio was 75.7%, compared with 78.0% in 2018.
- Borrowings included $33.3 million of repurchase agreements, $211,000 of FHLB advances and $15.0 million of junior subordinated debt outstanding.
- Management stated that liquidity was adequate and identified core deposits, short-term investments, correspondent lines and FHLB borrowing capacity as principal liquidity sources.
Asset quality, capital and balance-sheet composition
- Non-performing assets were $3.7 million, or 0.32% of assets, versus 0.37% in 2018.
- Non-performing loans were 0.31% of period-end loans, and net charge-offs were negative 0.03% of average loans, reflecting net recoveries.
- The allowance for loan losses increased to $6.6 million, or 0.90% of loans, from $6.3 million, or 0.87%.
- Approximately 91.6% of loans were secured by real estate; commercial real estate and commercial construction loans totaled approximately $587.4 million, or 79.9% of loans.
- The Bank was well capitalized at year-end. Tier 1 risk-based capital was 13.5%, total risk-based capital was 14.3%, CET1 was 13.5% and leverage capital was 10.0%, excluding the capital conservation buffer from the presented ratios.
- Shares repurchased totaled 300,000 at a cost of $5.6 million. A new authorization for up to 200,000 additional shares remained unused at year-end.
Material changes versus the prior comparable period
- Deposits grew faster than loans, increasing liquidity and shifting additional funds into investment securities and short-term balances.
- Investment securities increased to $286.8 million from $237.9 million; all securities previously classified as held-to-maturity were transferred to available-for-sale during the first quarter of 2019.
- Two full-service offices opened in 2019, in downtown Greenville, South Carolina and Evans, Georgia, while the mortgage loan production office in Richland County was consolidated in January 2020.
- Mortgage loan production increased to $139.6 million from $119.7 million, and assets under management increased to $369.7 million from $288.5 million.
- Non-interest income improved due principally to mortgage banking, investment advisory, debit-card income and securities gains, partly offset by lower deposit service charges and the premises write-down.
- The company adopted ASC 842, recording approximately $3.2 million of right-of-use assets and $3.3 million of lease liabilities.
- Accumulated other comprehensive income improved from a $2.3 million loss to $2.5 million of income, mainly because of lower market interest rates.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management expects core deposits to remain the primary funding source, anticipates adequate liquidity and expects the Bank to remain well capitalized for at least the following 12 months. Management continues to emphasize quality loan growth, expense management, interest-rate-risk monitoring and investments in digital banking and franchise expansion.
- Interest-rate risk is significant: management reported modeled 12-month net interest income declines of 1.09% for a 100-basis-point increase and 1.88% for a 100-basis-point decrease in rates.
- Credit risk is concentrated in commercial real estate and other real-estate-secured lending. Regulatory scrutiny or deterioration in local real estate markets could increase provisions, charge-offs and capital needs.
- The company expects CECL to become effective January 1, 2023 and anticipates a one-time cumulative adjustment to the allowance, but cannot yet estimate its magnitude.
- Management identified the coronavirus outbreak in early 2020 as a potential source of disruption to customers, employees, vendors, financial markets and economic activity; the impact was not determinable as of the filing date.
- Other principal risks include margin compression, deposit outflows, funding access, cybersecurity and vendor risks, competition, regulatory changes, LIBOR transition, litigation, natural disasters and the ability to retain key personnel.
- Legal proceedings are described as incidental to ordinary operations, and management does not believe any pending or threatened matter would have a material effect.
- The 2019 unusual items included the $282,000 premises write-down, a $136,000 securities gain and $5.6 million of common-stock repurchases.
Most important facts for investors to verify
- Whether commercial real estate concentrations and local market conditions remain consistent with the allowance for loan losses and capital levels.
- The effect of future interest-rate changes on the 3.65% net interest margin and deposit funding costs.
- The eventual balance-sheet and capital impact of CECL adoption in 2023.
- The extent to which 2019 expense increases from new offices, personnel and technology produce sustainable revenue growth.
- Future deposit trends, liquidity availability and the maturity or repricing profile of deposits and borrowings.
- Execution and economic effects of the 2020 coronavirus response, including any subsequent loan modifications, delinquencies or provisions.
- The continuation of quarterly dividends and the use of the remaining 200,000-share repurchase authorization, both of which remain subject to board, regulatory and capital considerations.
- The filing’s audited financial statements and internal-control report, both of which received unqualified opinions from Elliott Davis, LLC.