First Community Corporation — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company whose principal subsidiary provides commercial and retail banking, mortgage banking, investment advisory and non-deposit services. This report covers the unaudited three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017 and, for balance-sheet items, December 31, 2017.
The results include the operations of Cornerstone Bancorp and Cornerstone National Bank, acquired on October 20, 2017, for approximately $27.1 million in cash and stock.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 or prior period |
|---|---|---|
| Total assets | $1.071 billion at March 31, 2018 | $1.051 billion at December 31, 2017 |
| Net income | $2.709 million | $1.756 million |
| Diluted EPS | $0.35 | $0.26 |
| Net interest income | $8.534 million | $7.061 million |
| Net interest margin | 3.61%; 3.66% tax-equivalent | 3.42%; 3.52% tax-equivalent |
| Non-interest income | $2.631 million | $1.978 million |
| Non-interest expense | $7.594 million | $6.720 million |
| Provision for loan losses | $202 thousand | $116 thousand |
| Operating cash flow | $1.300 million | $8.962 million |
- Average earning assets increased to $957.9 million from $838.5 million. Loan yield increased to 4.69% from 4.60%, while the cost of interest-bearing liabilities remained 0.45%.
- Gross loans were $668.6 million at March 31, 2018, up from $646.8 million at December 31, 2017 and $555.3 million at March 31, 2017. Commercial mortgage loans represented 73.1% of gross loans.
- Deposits increased to $919.9 million from $888.3 million at year-end 2017. The loan-to-deposit ratio was 73.5%.
- Cash and cash equivalents were $38.9 million at March 31, 2018, compared with $30.1 million at December 31, 2017. Cash flow from investing was negative $12.5 million, primarily reflecting loan growth and securities activity; financing cash flow was positive $19.6 million, primarily from deposit growth.
- Investment securities totaled $270.7 million, consisting of $253.7 million available-for-sale and $17.0 million held-to-maturity.
- The allowance for loan losses was $6.0 million, or 0.90% of gross loans. Net charge-offs were $12 thousand, and non-performing assets were approximately $5.1 million, or 0.47% of total assets.
- Shareholders’ equity was $105.5 million, or 9.9% of total assets. The Bank’s March 31, 2018 leverage, Tier 1 and total risk-based capital ratios were 9.7%, 13.3% and 14.1%, respectively; management stated that the Company and Bank remained well capitalized.
- Comprehensive income was $517 thousand, compared with $2.119 million in the prior-year quarter, primarily because of a $2.192 million after-tax unrealized loss on available-for-sale securities.
Material Changes Versus Comparable Periods
- Net income increased approximately 54%, and diluted EPS increased from $0.26 to $0.35. Management attributed the improvement primarily to higher net interest income, balance-sheet growth from the Cornerstone acquisition, a wider net interest margin and a lower effective tax rate.
- Net interest income increased $1.473 million, supported by higher average earning assets, greater loan concentration and improved asset yields.
- Non-interest income increased $653 thousand. Mortgage banking income rose to $951 thousand from $670 thousand, investment advisory and non-deposit commissions rose to $383 thousand from $258 thousand, and deposit service charges rose to $463 thousand from $320 thousand.
- Non-interest expense increased $874 thousand. The principal increases were salaries and benefits, data-processing costs, mortgage commissions and amortization of the Cornerstone core-deposit intangible.
- The effective tax rate declined to 19.6% from 20.3%, reflecting the Tax Cuts and Jobs Act reduction in the federal corporate tax rate. Management expected an effective tax rate of approximately 19.5% to 20.0% for the remainder of 2018.
- Compared with December 31, 2017, loans increased $21.8 million and deposits increased $31.6 million, while investment securities declined $11.8 million and Federal Home Loan Bank advances declined by approximately $14.0 million.
- Accumulated other comprehensive loss increased to $2.636 million from $444 thousand, reflecting changes in the fair value of available-for-sale securities.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance was provided. Management stated that first-quarter results are not necessarily indicative of full-year results.
- Management expects the effective tax rate to remain approximately 19.5% to 20.0% during the remainder of 2018 and intends to continue pursuing loan growth, core-deposit growth, mortgage banking income and investment advisory fees.
- Management identified credit losses, declining real estate values, rising interest rates, unemployment, borrower payment behavior, regulatory actions, allowance adequacy, securities impairment, merger integration, competition, deposit flows, cybersecurity and economic conditions as significant risks.
- Approximately 91.6% of the loan portfolio was secured by real estate at March 31, 2018, creating sensitivity to real estate values and local economic conditions. Commercial mortgage loans comprised 73.1% of gross loans.
- The company had $121.4 million of commitments to extend credit, including $39 million of unused home equity lines. These commitments expose the company to potential future funding and credit losses.
- The company was asset-sensitive within one year. Management’s modeled change in net interest income over twelve months was negative 2.40% under a 200-basis-point increase and negative 6.86% under a 200-basis-point decrease in short-term rates; these estimates depend on assumptions and are not predictions.
- Adoption of revenue-recognition guidance and financial-instruments guidance in 2018 did not materially affect the financial statements. The company was evaluating the future lease and credit-loss standards.
- No material pending legal proceedings or subsequent events requiring accrual or disclosure were reported. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Whether loan growth, especially in commercial real estate, remains consistent with credit-quality trends and the 0.90% allowance coverage ratio.
- Changes in non-accrual loans, classified loans, charge-offs, real estate collateral values and the unallocated allowance.
- The sustainability of the higher net interest margin as deposit costs and market interest rates change.
- The effect of Cornerstone integration, including expense synergies, customer retention, employee retention and additional amortization of acquired intangibles.
- The magnitude and duration of unrealized securities losses and any future other-than-temporary impairment charges.
- Progress against management’s 2018 incentive-plan measures: return on assets, efficiency ratio, net interest margin, loan growth and pure-deposit growth.
- Capital ratios, dividend capacity and regulatory requirements, including the fully phased-in Basel III capital conservation buffer.