First Community Corporation — 2019 Q1 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company whose primary subsidiary provides commercial and retail banking, mortgage banking, investment advisory, and non-deposit services. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared primarily with the three months ended March 31, 2018 and, for balance-sheet items, December 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Comparable period / prior date |
|---|---|---|
| Total assets | $1.097 billion | $1.092 billion at Dec. 31, 2018; $1.071 billion at Mar. 31, 2018 |
| Total loans | $718.4 million | $718.5 million at Dec. 31, 2018; $668.6 million at Mar. 31, 2018 |
| Total deposits | $919.8 million | $925.5 million at Dec. 31, 2018 |
| Net interest income | $9.0 million | $8.5 million in Q1 2018 |
| Net interest margin | 3.68% | 3.61% in Q1 2018 |
| Net income | $2.5 million | $2.7 million in Q1 2018 |
| Diluted earnings per share | $0.32 | $0.35 in Q1 2018 |
| Net cash used in operating activities | $(2.2) million | $1.3 million provided in Q1 2018 |
| Cash and cash equivalents | $38.2 million | $32.3 million at Dec. 31, 2018 |
| Shareholders’ equity | $116.4 million | $112.5 million at Dec. 31, 2018 |
Interest income increased to $10.4 million from $9.3 million, while interest expense rose to $1.4 million from $0.8 million. Average earning assets increased to $993.5 million from $957.9 million, and the yield on earning assets rose to 4.23% from 3.95%. The cost of interest-bearing liabilities increased to 0.76% from 0.45%.
Provision for loan losses declined to $105 thousand from $202 thousand. The allowance for loan losses was $6.4 million, or 0.88% of total loans. Net charge-offs were $14 thousand, compared with $12 thousand in Q1 2018.
Non-interest income decreased to $2.5 million from $2.6 million, primarily reflecting lower mortgage banking income and deposit service charges. Non-interest expense increased to $8.3 million from $7.6 million, driven principally by salaries and benefits, occupancy, and marketing costs.
Material changes versus prior comparable period
- Net income declined approximately 8% and diluted EPS declined from $0.35 to $0.32.
- Net interest income increased approximately 6%, supported by growth in average earning assets and a seven-basis-point improvement in net interest margin.
- Loans increased approximately 7% year over year but were essentially unchanged from year-end 2018. Commercial mortgage loans increased to $519.4 million from $513.8 million at year-end.
- Mortgage production decreased to $25.8 million from $27.9 million, and mortgage banking income decreased to $844 thousand from $951 thousand.
- Investment advisory assets under management increased to $330 million from $272 million, contributing to higher advisory fees.
- Non-interest expense increased primarily because of the opening and staffing of offices in downtown Augusta and downtown Greenville. The Greenville office opened in February 2019.
- The company reclassified its entire $16.2 million held-to-maturity securities portfolio to available-for-sale. No held-to-maturity securities remained at March 31, 2019.
- Accumulated other comprehensive loss improved from $(2.3) million at year-end to $(29) thousand, principally due to changes in the fair value of available-for-sale securities.
Liquidity, capital, outlook, and risks
Management stated that liquidity was adequate for operating and loan-funding requirements. Interest-bearing bank balances, federal funds sold, and available-for-sale securities represented 24.6% of total assets. The company reported $123.9 million of commitments to extend credit, including $37 million of unused home-equity lines.
The bank met all applicable capital-adequacy requirements on a fully phased-in Basel III basis. At March 31, 2019, the bank reported leverage, Tier 1 risk-based, total risk-based, and Common Equity Tier 1 ratios of 10.2%, 13.3%, 14.1%, and 13.3%, respectively, and management expected the bank to remain well capitalized for at least the next 12 months.
Management expected the effective tax rate to remain approximately 20.0% to 20.5% for the remainder of 2019. The filing does not provide quantitative earnings or revenue guidance.
Key risks include concentration of loans secured by real estate, credit losses, changes in interest rates and net interest margins, deposit outflows and funding access, regulatory examinations and capital requirements, securities impairment, economic deterioration, cybersecurity, competition, personnel retention, and merger or integration risk. Approximately 91.4% of the loan portfolio was secured by real estate at March 31, 2019.
Non-performing assets were $4.1 million, or 0.38% of total assets, compared with $4.0 million, or 0.37%, at year-end 2018. Non-accrual loans were $2.6 million. The company reported no material pending legal proceedings and no material changes to the risk factors disclosed in its 2018 Form 10-K.
Unusual items and accounting developments
- Adoption of ASC 842 resulted in recognition of a $2.8 million operating lease right-of-use asset and a $2.8 million lease liability.
- Other comprehensive income was $2.3 million, compared with a $2.2 million loss in Q1 2018, due primarily to available-for-sale securities valuation changes.
- Operating cash flow was negative despite positive net income, primarily reflecting loan-sale activity and changes in other assets and liabilities.
- Management stated that no subsequent events requiring accrual or disclosure occurred through the financial statement issuance date.
Important facts for investors to verify
- Whether higher deposit funding costs continue to pressure the net interest margin.
- Credit quality trends, especially within the heavily real-estate-secured commercial mortgage portfolio.
- The adequacy of the $6.4 million allowance for loan losses under changing economic and regulatory conditions.
- Whether mortgage production and mortgage banking income recover after the Q1 decline.
- The effect of new offices and related staffing costs on operating efficiency and future earnings.
- Changes in the fair value and unrealized gains or losses of the available-for-sale securities portfolio.
- Deposit growth, liquidity usage, and the company’s $123.9 million of unfunded lending commitments.
- Actual future results relative to management’s stated tax-rate expectation and absence of formal earnings guidance.