First Community Corporation — 2014 Q2 Form 10-Q Summary
Business Context and Reporting Period
First Community Corporation, a South Carolina bank holding company, filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company operates primarily through First Community Bank and earns most revenue from interest on loans and securities, supplemented by banking and advisory fees.
On February 1, 2014, the company acquired Savannah River Financial Corporation for approximately $33.5 million, including $19.8 million in cash and 1,274,200 shares of common stock. The acquisition materially increased the company’s assets, deposits, loans, employees, and operating expenses.
Financial Performance and Key Metrics
| Metric | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|
| Total interest income | $13.3 million | $10.7 million |
| Net interest income | $11.4 million | $8.7 million |
| Provision for loan losses | $550 thousand | $250 thousand |
| Non-interest income | $3.8 million | $4.4 million |
| Non-interest expense | $11.8 million | $9.8 million |
| Net income | $2.1 million | $2.2 million |
| Diluted EPS | $0.32 | $0.42 |
| Tax-equivalent net interest margin | 3.38% | 3.13% |
| Operating cash flow | $6.5 million | $9.4 million |
| Ending cash and cash equivalents | $29.8 million | $24.3 million |
For the second quarter, net income was $1.2 million, or $0.18 diluted EPS, compared with $1.2 million, or $0.23 diluted EPS, in the prior-year quarter. Net interest income increased to $5.9 million from $4.4 million, while the tax-equivalent net interest margin increased to 3.39% from 3.11%.
- Total assets were $786.7 million at June 30, 2014, versus $633.3 million at December 31, 2013.
- Gross loans were $444.7 million, up from $347.6 million at year-end 2013. Commercial mortgage loans represented 67.0% of gross loans.
- Deposits were $640.1 million, up from $497.1 million at year-end 2013. The loan-to-deposit ratio was 69.9%.
- Available-for-sale securities were $248.4 million, compared with $224.4 million at year-end 2013.
- Shareholders’ equity was $71.0 million, or 9.0% of total assets, compared with $52.7 million, or 8.3%, at year-end 2013.
- Total borrowings included $37.9 million of Federal Home Loan Bank advances, $16.4 million of repurchase obligations, and $15.5 million of junior subordinated debt.
- The allowance for loan losses was $4.1 million, or 0.91% of gross loans, compared with $4.2 million, or 1.21%, at year-end 2013.
Material Changes Versus the Prior Comparable Period
- Net interest income increased $2.7 million for the first six months, primarily because the Savannah River acquisition increased average earning assets to $695.5 million from $573.6 million.
- Net interest margin improved by 25 basis points on a tax-equivalent basis, reflecting higher securities yields and lower funding costs.
- Non-interest income declined $604 thousand, largely because mortgage banking income fell $877 thousand as higher mortgage rates reduced refinancing activity.
- Non-interest expense rose $2.0 million, or approximately 21%, primarily due to the acquired operations, higher staffing, occupancy and equipment costs, and $435 thousand of merger-related expenses.
- Net income declined $178 thousand, while diluted EPS fell because of merger-related expenses, lower mortgage banking income, and a larger share count following the acquisition.
- Loan growth was largely acquisition-driven. Acquired loans totaled approximately $106.5 million, while organic loans declined approximately $9.4 million during the first half.
- Net charge-offs increased to $703 thousand from $432 thousand, and the provision for loan losses increased to $550 thousand from $250 thousand.
- Accumulated other comprehensive income improved to $390 thousand from a $2.5 million loss at year-end 2013, primarily because of unrealized gains on available-for-sale securities.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that liquidity and capital are adequate to fund operations for at least the next 12 months and expects the company and bank to remain well capitalized.
- Management expects an effective tax rate of approximately 27.5% to 30.0% for the remainder of 2014.
- On June 23, 2014, the bank announced an agreement to acquire approximately $43 million of deposits and $9 million of loans from First South Bank for an $800 thousand premium, subject to regulatory approval and other closing conditions. The transaction was expected to close by the end of the third quarter of 2014.
- Non-performing assets were $11.1 million, or 1.41% of total assets, at June 30, 2014, compared with $8.8 million, or 1.39%, at December 31, 2013. Nonaccrual loans were $7.7 million.
- Impaired loans increased to $8.2 million from $6.0 million at year-end 2013. Two loans totaling $1.9 million were identified as troubled debt restructurings during the first six months.
- The portfolio is heavily concentrated in real-estate-secured lending. Management identified declining real estate values, credit deterioration, loan growth and seasoning, regulatory actions, funding access, interest-rate changes, cybersecurity, competition, and deposit flows as material risks.
- The company was asset sensitive within one year. Management’s interest-rate simulation estimated that a 200-basis-point increase would increase net interest income by 1.62%, while a 200-basis-point decrease would reduce it by 12.53%.
- At June 30, 2014, the bank’s leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.6%, 15.0%, and 15.8%, respectively. The company’s corresponding ratios were 10.1%, 15.8%, and 16.6%.
- Management reported no material pending legal proceedings, no material subsequent events requiring disclosure, and effective disclosure controls.
Important Facts for Investors to Verify
- Whether the First South Bank deposit and loan acquisition closed on the expected terms and generated the anticipated funding or revenue benefits.
- Whether non-performing and impaired loans continue to rise, particularly in the commercial real estate portfolio.
- Whether the allowance for loan losses remains adequate as acquired loans season and fair-value credit marks are refined.
- Whether mortgage banking activity recovers after the refinancing slowdown and whether non-interest income improves.
- Whether acquisition-related cost savings and revenue synergies are realized without further material integration expenses.
- The effect of Basel III capital requirements beginning in January 2015 and any related changes to regulatory capital ratios.
- The sensitivity of net interest income and securities values to changes in interest rates, real estate values, and deposit funding costs.