First Community Corporation — Q2 2013 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company focused on community banking, including commercial and real estate lending, deposit gathering, mortgage origination, investment advisory services and securities investing. The filing covers the three and six months ended June 30, 2013; financial statements are unaudited.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net income | $1.203 million | $0.928 million | $2.241 million | $1.727 million |
| Net income available to common shareholders | $1.203 million | $0.760 million | $2.241 million | $1.390 million |
| Diluted EPS | $0.23 | $0.23 | $0.42 | $0.42 |
| Net interest income | $4.423 million | $4.451 million | $8.702 million | $8.960 million |
| Non-interest income | $2.295 million | $1.855 million | $4.378 million | $3.318 million |
| Non-interest expense | $4.955 million | $4.908 million | $9.762 million | $9.520 million |
| Net interest margin, taxable-equivalent basis | 3.11% | 3.30% | 3.13% | 3.33% |
- Six-month total interest income was $10.653 million and interest expense was $1.951 million. The cost of interest-bearing liabilities declined to 0.86% from 1.30%.
- Mortgage origination fees increased to $2.198 million for the first six months, from $1.600 million. Management attributed the increase primarily to refinancing and purchase activity supported by low interest rates.
- Six-month operating cash flow was $9.379 million, compared with $4.464 million in the prior-year period. Investing cash flow was an outflow of $35.572 million, while financing cash flow provided $31.772 million. Ending cash and cash equivalents were $24.287 million.
- At June 30, 2013, total assets were $633.2 million, loans were $341.1 million, net loans were $336.7 million, available-for-sale securities were $223.6 million and deposits were $509.6 million.
- Total debt and other borrowings included $34.3 million of Federal Home Loan Bank advances, $15.7 million of repurchase borrowings and $15.5 million of junior subordinated debt.
- Shareholders’ equity was $52.8 million, or 8.3% of assets. The Bank’s leverage, Tier 1 risk-based and total risk-based capital ratios were 10.21%, 16.61% and 17.77%, respectively. The Company’s corresponding ratios were 10.61%, 17.25% and 18.41%.
Material changes versus comparable periods
- Six-month net income increased 30% to $2.241 million, principally because non-interest income increased $1.060 million, partly offset by a $258 thousand decrease in net interest income and a $242 thousand increase in non-interest expense.
- Net interest income declined despite higher average earning assets of $573.6 million versus $547.0 million, as the taxable-equivalent net interest margin fell 20 basis points to 3.13%.
- Deposits increased $34.6 million from year-end 2012, while loans increased $9.0 million and investment securities increased approximately $19.9 million. The loan-to-deposit ratio declined to 66.9% from 69.9%.
- The allowance for loan losses decreased to $4.439 million from $4.621 million, or 1.30% of loans versus 1.39%. Provision expense declined to $250 thousand from $301 thousand, but net charge-offs increased to $432 thousand from $258 thousand.
- Non-performing assets were $8.802 million, or 1.39% of assets, compared with $8.8 million, or 1.45%, at year-end 2012. Nonaccrual loans increased to $5.978 million from $4.715 million.
- Other comprehensive loss was $3.238 million for the first six months, primarily from unrealized losses on available-for-sale securities. Accumulated other comprehensive income declined to a loss of $880 thousand from income of $2.358 million at December 31, 2012.
- No other-than-temporary impairment charge was recorded in the first six months of 2013, compared with a $200 thousand credit-component charge in the prior-year period.
Outlook, risks, contingencies and unusual items
- Management stated that liquidity and capital were adequate and expected the Company and Bank to remain well capitalized for at least the next 12 months. Liquid assets, including interest-bearing bank balances, federal funds sold and available-for-sale securities, represented 37.6% of assets.
- Management expects an effective tax rate of approximately 26.5% to 28.0% for the remainder of 2013. No formal earnings or revenue guidance was provided.
- Management cited continued risks from the large concentration of real-estate-secured loans, declining or volatile real estate values, credit losses, non-performing loans, regulatory examinations, allowance adequacy, securities impairment, funding access, deposit flows, interest-rate changes and economic conditions.
- The company was slightly liability-sensitive within one year. Its interest-rate simulation estimated a 5.23% increase in next-twelve-month net interest income under a 200-basis-point increase and an 11.19% decrease under a 200-basis-point decline, subject to model assumptions.
- Credit commitments totaled $47.3 million, including $25.4 million of unused home equity lines. Management reported no material pending legal proceedings.
- A five-year, $10.0 million interest-rate swap expires October 8, 2013. Its fair value was a negative $172 thousand at June 30, 2013.
- Management identified one potential problem loan relationship totaling approximately $964 thousand that was current and excluded from non-performing assets. One $257 thousand loan was modified as a troubled debt restructuring during the first six months.
Important facts for investors to verify
- Whether the decline in net interest margin persists as securities yields remain low and interest rates change.
- Whether nonaccrual loans, real-estate collateral values and net charge-offs require additional provisions or write-downs.
- The sustainability of mortgage origination revenue as refinancing activity declines and purchase activity becomes a larger component.
- The effect of unrealized securities losses, interest-rate movements and potential future impairment charges on equity and comprehensive income.
- The company’s ability to maintain its reported capital ratios, liquidity resources and deposit growth while funding loan expansion.
- The expiration and replacement or non-replacement of the interest-rate swap in October 2013.