First Community Corporation — Q3 2015 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company whose principal subsidiary is First Community Bank. The filing covers the unaudited quarter and nine months ended September 30, 2015, compared primarily with the corresponding 2014 periods and December 31, 2014 balance-sheet amounts. The company reported 6,684,563 common shares outstanding as of November 12, 2015.
Financial condition and results
| Metric | Q3 2015 or September 30, 2015 | Comparable period or December 31, 2014 |
|---|---|---|
| Net income, nine months | $4.526 million | $3.615 million |
| Diluted EPS, nine months | $0.68 | $0.55 |
| Net income, third quarter | $1.679 million | $1.552 million |
| Diluted EPS, third quarter | $0.25 | $0.23 |
| Net interest income, nine months | $18.905 million | $17.539 million |
| Net interest margin, tax-equivalent, nine months | 3.43% | 3.42% |
| Net interest margin, tax-equivalent, third quarter | 3.32% | 3.48% |
| Non-interest income, nine months | $6.875 million | $6.074 million |
| Non-interest expense, nine months | $18.556 million | $17.871 million |
| Total assets | $852.329 million | $812.363 million |
| Gross loans | $483.931 million | $443.844 million |
| Total deposits | $704.370 million | $669.583 million |
| Shareholders’ equity | $78.488 million | $74.528 million |
All dollar amounts in the table are in millions except per-share data, unless otherwise stated.
- Loan growth was concentrated in commercial real estate mortgage loans, which increased to $323.5 million from $293.2 million at year-end 2014. The loan-to-deposit ratio was 69.2%, compared with 66.9% at year-end.
- Net interest income benefited from higher average earning assets and lower funding costs. Average earning assets increased to $759.2 million from $701.7 million, while the cost of interest-bearing liabilities declined to 0.56% from 0.63% for the nine-month comparison.
- Third-quarter margin pressure was more pronounced: the tax-equivalent margin declined to 3.32% from 3.48%, primarily reflecting lower asset yields in the continuing low-interest-rate environment.
- Non-interest income growth was driven mainly by mortgage banking income and investment advisory fees. Nine-month mortgage banking income was $2.679 million, and investment advisory fees and non-deposit commissions were $993 thousand.
- The nine-month provision for loan losses increased to $990 thousand from $702 thousand. The allowance for loan losses was $4.468 million, or 0.92% of gross loans, versus $4.132 million, or 0.93%, at year-end.
- Non-performing assets declined to $7.519 million, or 0.88% of total assets, from $9.904 million, or 1.19%, at December 31, 2014. Non-accrual loans were $5.067 million.
- Cash provided by operating activities was $10.967 million, compared with $9.218 million in the prior-year period. Investing activities used $35.201 million, primarily reflecting loan growth and securities activity, while financing activities provided $34.713 million. Cash and cash equivalents ended at $33.011 million.
- Debt and other funding at September 30, 2015 included $27.543 million of Federal Home Loan Bank advances, $19.908 million of repurchase agreements, and $15.464 million of junior subordinated debt.
- The company reported that both it and the Bank met or exceeded required Basel III capital ratios on a fully phased-in basis. The Bank’s leverage, Tier 1, total capital, and CET1 ratios were 9.8%, 14.9%, 15.7%, and 14.9%, respectively. The company’s corresponding ratios were 10.3%, 15.7%, 16.5%, and 13.0%.
Material changes versus prior comparable periods
- Nine-month net income increased approximately 25%, reflecting higher average earning assets, organic loan growth, stronger non-interest income, and the absence of 2014 merger-related expenses.
- Third-quarter net income increased approximately 8%, despite lower net interest margin, as earning-asset growth offset lower yields.
- Nine-month non-interest income increased $801 thousand, while non-interest expense increased $685 thousand. The 2014 period included $474 thousand of merger and acquisition expense; no such expense was recorded in 2015.
- Deposits increased $34.8 million, with non-interest-bearing demand deposits increasing to $157.7 million from $133.0 million. The company continued shifting funding toward lower-cost transaction and demand accounts.
- Investment securities declined to $273.7 million from $282.8 million. Available-for-sale securities had $898 thousand of unrealized losses at September 30, 2015, compared with $1.358 million at year-end; management did not consider the securities to be other-than-temporarily impaired.
- Impaired loans declined to $6.720 million from $8.559 million. No new troubled debt restructurings were recorded during the 2015 three- or nine-month periods.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide formal earnings or revenue guidance. Management stated that the effective tax rate was expected to remain approximately 27% to 30% through the remainder of 2015.
- Management expects liquidity and capital to remain adequate for at least the next 12 months and anticipates remaining well capitalized. Available liquidity sources include core deposits, securities, Federal Home Loan Bank borrowing capacity, federal funds lines, and a repurchase agreement line.
- The Bank entered into an FDIC Consent Order in February 2015 concerning Bank Secrecy Act and anti-money-laundering controls, risk assessments, internal controls, and training. Management stated that it believes the identified issues have been addressed, but the FDIC could impose additional requirements, restrictions, supervision, or penalties if progress is deemed inadequate.
- The loan portfolio is heavily concentrated in real estate, particularly commercial real estate. Declines in collateral values, higher interest rates, unemployment, borrower payment problems, or adverse economic conditions could increase provisions, charge-offs, and capital requirements.
- The company was asset sensitive within one year. Its modeled 12-month net interest income sensitivity was positive 3.93% for a 200-basis-point rate increase and negative 9.81% for a 200-basis-point decrease, subject to management’s stated assumptions and limitations.
- South Carolina experienced significant flooding in early October 2015. One banking office sustained damage, but operations were not significantly affected. Management’s initial assessment was that the event had not materially adversely affected the loan portfolio, while evaluation continued.
- Unusual items included a $120 thousand write-down of excess property, a $103 thousand loss from early extinguishment of debt, and favorable income recognition associated with payoffs of two purchased credit-impaired loans.
- Management identified no material pending legal proceedings and concluded that disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- Review the FDIC Consent Order, remediation status, and any subsequent regulatory findings or penalties.
- Assess commercial real estate concentration, criticized and impaired loans, non-accrual trends, collateral values, and the adequacy of the allowance for loan losses.
- Reconcile reported earnings growth with the absence of 2014 merger expenses, purchased-credit-impaired loan recoveries, and other nonrecurring items.
- Monitor third-quarter net interest margin compression and sensitivity to changes in short-term interest rates.
- Verify the effect of the October 2015 flooding on borrowers, collateral, loan modifications, and future credit costs.
- Confirm capital ratios, dividend capacity, liquidity availability, and compliance with Basel III requirements in subsequent filings.