First Community Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company operating through First Community Bank. The unaudited filing covers the three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012 and the December 31, 2012 balance sheet. The company had 5,290,452 common shares outstanding as of May 14, 2013.
Key financial metrics
| Metric | Q1 2013 / March 31, 2013 | Comparable period / December 31, 2012 |
|---|---|---|
| Net income | $1.038 million | $0.799 million in Q1 2012 |
| Net income available to common shareholders | $1.038 million | $0.630 million in Q1 2012 |
| Diluted EPS | $0.20 | $0.19 in Q1 2012 |
| Net interest income | $4.279 million | $4.509 million in Q1 2012 |
| Tax-equivalent net interest margin | 3.15% | 3.36% in Q1 2012 |
| Non-interest income | $2.083 million | $1.463 million in Q1 2012 |
| Non-interest expense | $4.807 million | $4.612 million in Q1 2012 |
| Provision for loan losses | $150 thousand | $230 thousand in Q1 2012 |
| Total assets | $625.855 million | $602.925 million at December 31, 2012 |
| Gross loans | $333.720 million | $332.111 million at December 31, 2012 |
| Total deposits | $497.024 million | $474.977 million at December 31, 2012 |
| Shareholders’ equity | $54.770 million | $54.183 million at December 31, 2012 |
Net income increased approximately 30% year over year, while net income available to common shareholders increased approximately 65% because Q1 2012 included $169 thousand of preferred stock dividends and discount accretion. The effective tax rate was 26.1%, compared with 29.3% in Q1 2012.
Cash and cash equivalents increased to $31.839 million from $18.708 million at year-end 2012. Operating activities provided $7.408 million, investing activities used $17.400 million, and financing activities provided $23.123 million. Available-for-sale investment securities totaled $218.244 million, and interest-bearing bank balances, federal funds sold, and available-for-sale securities represented 38.6% of total assets.
Total debt and other borrowings included $36.339 million of Federal Home Loan Bank advances, $17.216 million of securities sold under repurchase agreements, and $15.464 million of junior subordinated debt. The loan-to-deposit ratio was 67.1%. The company reported shareholders’ equity equal to 8.8% of total assets.
The allowance for loan losses was $4.534 million, or 1.36% of gross loans, compared with $4.621 million, or 1.39%, at December 31, 2012. Net charge-offs were $237 thousand, and non-performing assets were $9.047 million, or 1.45% of total assets. Nonaccrual loans were $5.388 million, and loans more than 90 days past due and still accruing were $325 thousand.
Regulatory capital remained strong. At March 31, 2013, the bank reported leverage, Tier 1 risk-based, and total risk-based capital ratios of 10.42%, 17.03%, and 18.27%, respectively. The corresponding company ratios were 10.78%, 17.59%, and 18.82%. Management expected both entities to remain well capitalized for at least the next 12 months.
Material changes versus prior comparable periods
- Net interest income declined $230 thousand, or approximately 5%, as the tax-equivalent net interest margin fell 21 basis points to 3.15%. The yield on earning assets declined to 3.81% from 4.48%, partly offset by lower funding costs.
- Non-interest income increased $620 thousand, or approximately 42%, primarily because mortgage origination fees rose to $1.015 million from $723 thousand and no other-than-temporary impairment charge was recorded in Q1 2013.
- Q1 2012 included a $200 thousand credit-component impairment charge on private-label mortgage-backed securities, a $121 thousand loss on early extinguishment of debt, and $33 thousand of fair-value adjustment losses; none of these items recurred in Q1 2013.
- Non-interest expense increased $195 thousand, or 4.2%, mainly because salaries and employee benefits increased $434 thousand. Full-time equivalent employees increased to 163 from 158.
- Total assets increased $23.0 million from year-end 2012, driven primarily by a $22.0 million increase in deposits and a $14.6 million increase in investment securities. Gross loans increased $1.6 million.
- Non-performing assets declined from $10.801 million in Q1 2012 but increased modestly from $8.8 million at December 31, 2012. Impaired loans increased to $6.296 million from $6.176 million at year-end.
Outlook, management commentary, risks, and unusual items
Management stated that liquidity was adequate for operating and loan-funding requirements and believed core deposits, maturing assets, securities sales, repurchase capacity, federal funds lines, and Federal Home Loan Bank access would support needs for at least the next 12 months. The company had $49.0 million of commitments to extend credit, including $25.5 million of unused home-equity lines.
Management expected the effective tax rate to remain approximately 26.5% to 28.0% during the remainder of 2013. No formal revenue or earnings guidance was provided.
The principal risks are credit deterioration, declining real estate values, the company’s substantial concentration of real-estate-secured loans, additional loan-loss provisions, regulatory requirements, deposit outflows, funding availability, interest-rate changes, securities impairment, competition, cybersecurity, and broader economic weakness. The company was liability-sensitive within one year; modeled net interest income would decline 7.92% under an immediate 100-basis-point rate decrease and 11.73% under a 200-basis-point decrease.
The investment portfolio had $782 thousand of gross unrealized losses at March 31, 2013. Management recorded no Q1 2013 OTTI charge but continued to monitor private-label mortgage-backed securities and other investments. Management also identified two current loan relationships totaling $1.8 million as potential problem loans. No material pending legal proceedings or reportable subsequent events were disclosed.
Important facts for investors to verify
- Whether the improvement in earnings is sustainable or primarily reflects mortgage origination fees and the absence of prior-year impairment and debt-extinguishment charges.
- Whether net interest margin pressure continues as low asset yields persist and interest-rate sensitivity remains unfavorable in falling-rate scenarios.
- The trend in non-performing assets, nonaccrual loans, impaired loans, classified loans, charge-offs, and the adequacy of the $4.534 million allowance.
- Real estate collateral valuations and the potential effect of further market deterioration on loan losses and other real estate owned.
- The composition, credit performance, unrealized losses, and impairment exposure of the $218.244 million available-for-sale securities portfolio.
- Deposit stability, reliance on wholesale funding, and the company’s ability to maintain liquidity while expanding assets.
- The effect of proposed Basel III and Dodd-Frank capital and liquidity requirements, which had not yet been finalized.
- Future dividend capacity, which remains subject to bank earnings, capital needs, asset quality, and regulatory restrictions.