First Community Corporation — Q3 2011 Form 10-Q Summary
Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company for First Community Bank, N.A., operating 11 full-service offices and providing commercial banking, mortgage, investment advisory, brokerage, insurance and related services. The filing covers the three and nine months ended September 30, 2011; balance-sheet comparisons are to December 31, 2010. The company had 3,303,519 common shares outstanding as of November 9, 2011.
Effective July 31, 2011, the Bank acquired the operating assets of Palmetto South Mortgage Corporation for $22 thousand, with contingent earn-out consideration of $0 to $1.2 million over three years. Management estimated potential consideration of approximately $600 thousand based on recent operating results.
Financial Performance and Condition
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net interest income | $4.628 million | $4.483 million | $13.701 million | $13.655 million |
| Provision for loan losses | $360 thousand | $235 thousand | $1.110 million | $1.365 million |
| Non-interest income | $1.688 million | $922 thousand | $4.391 million | $2.674 million |
| Non-interest expense | $4.558 million | $4.644 million | $13.766 million | $13.036 million |
| Net income | $957 thousand | $394 thousand | $2.253 million | $1.457 million |
| Net income available to common shareholders | $790 thousand | $228 thousand | $1.751 million | $960 thousand |
| Diluted EPS | $0.24 | $0.07 | $0.53 | $0.29 |
Tax-equivalent net interest margin was 3.37% in Q3 2011 versus 3.21% in Q3 2010, and 3.33% for the first nine months versus 3.31% in the prior-year period. The nine-month yield on earning assets declined to 4.69% from 5.02%, but the cost of interest-bearing liabilities declined more sharply to 1.58% from 1.98%.
At September 30, 2011, total assets were $606.9 million, shareholders’ equity was $46.7 million, deposits were $473.2 million, gross loans were $324.2 million, investment securities were $208.9 million, and net loans were $319.5 million. The loan-to-deposit ratio was 68.5%, compared with 72.5% at December 31, 2010. Cash and cash equivalents totaled $18.0 million at quarter-end.
Allowance for loan losses was $4.7 million, or 1.45% of total loans, versus $4.9 million, or 1.49%, at December 31, 2010. Net charge-offs were $1.313 million for the first nine months, compared with $1.378 million in the prior-year period. Non-performing assets were $11.7 million, or 1.93% of total assets, versus $13.2 million, or 2.20%, at December 31, 2010. Nonaccrual loans declined to $3.4 million from $5.9 million.
Cash provided by operating activities was $7.0 million. Investing activities used $17.3 million, primarily reflecting net investment-security purchases and a $4.5 million decrease in loans. Financing activities provided $1.9 million, including a $17.8 million increase in deposits offset by $20.9 million of FHLB advance repayments. Cash and cash equivalents decreased by $8.5 million during the nine months.
At September 30, 2011, the Bank reported leverage, Tier 1 risk-based and total risk-based capital ratios of 8.90%, 14.52% and 15.77%, respectively. The holding company reported 9.10%, 14.82% and 16.07%. Management stated that the Bank and company remained well capitalized.
Material Changes Versus Prior Comparable Period
- Q3 net income increased 143% and nine-month net income increased 55%, primarily because of higher non-interest income and lower year-to-date loan-loss provisions.
- Non-interest income increased $766 thousand in Q3 and $1.717 million year to date. Mortgage origination fees, investment advisory fees and lower fair-value and securities-impairment losses were significant contributors.
- Net interest income rose modestly despite lower earning-asset balances because funding costs declined and net interest margins improved.
- Q3 provision expense increased to $360 thousand from $235 thousand, although the nine-month provision decreased by $255 thousand.
- Non-interest expense declined $86 thousand in Q3 but increased $730 thousand year to date, partly because of 13 full-time employees added with the Palmetto South mortgage business.
- Deposits increased $17.8 million from year-end, while FHLB advances declined $19.4 million. Pure deposits increased $30.9 million and time deposits decreased $13.1 million.
- The company sold 14 non-agency mortgage-backed securities with approximately $29.8 million of book value, reducing below-investment-grade securities to approximately $15.0 million from $39.0 million at December 31, 2010.
Guidance, Outlook, Risks and Unusual Items
Management expected the 2011 effective tax rate to remain between 28% and 32%. No formal earnings or revenue guidance was provided. Management stated that liquidity was adequate for operating and loan-funding needs and expected capital levels to remain above regulatory requirements for at least the next 12 months.
- The Bank remained subject to an April 2010 formal written agreement with the OCC concerning investment-portfolio risk and compliance requirements. Management believed it was in substantial compliance, but failure to comply could result in further regulatory action.
- The company remained subject to a Federal Reserve memorandum of understanding requiring prior approval for certain dividends, debt, capital actions and management appointments. Cash dividends also depended on regulatory approval and cash dividends from the Bank.
- Real estate concentrations, weak commercial real estate conditions, declining collateral values, loan-loss adequacy, delinquencies, charge-offs and troubled debt restructurings remain material credit risks. TDRs totaled $7.9 million at September 30, 2011, including $1.8 million in nonaccrual status.
- The investment portfolio included approximately $15.3 million of fair value in non-agency mortgage-backed securities, with approximately $14.0 million rated below investment grade. The company recognized $54 thousand of credit-related OTTI losses year to date and $50 thousand in Q3.
- The company recorded a $74 thousand loss on early extinguishment of debt in Q3 after prepaying $6.7 million of FHLB advances.
- Interest-rate exposure is material. Management estimated that a parallel 100-basis-point increase would increase projected 12-month net interest income by 3.07%, while a 100-basis-point decline would reduce it by 8.77%; these estimates depend on modeling assumptions.
- At September 30, 2011, the company had $41.8 million of commitments to extend credit, including $24.0 million of unused home-equity lines.
- Management identified no material subsequent events or material pending legal proceedings. Disclosure controls were reported effective.
Important Facts for Investors to Verify
- Progress and final determination of compliance with the OCC formal agreement and Federal Reserve memorandum of understanding.
- Future regulatory approval and sustainability of common and preferred dividend payments.
- Credit performance of the commercial real estate portfolio, TDRs, OREO and non-agency mortgage-backed securities.
- Adequacy of the $4.7 million loan-loss allowance if real estate values or economic conditions deteriorate.
- Actual earn-out consideration payable for the Palmetto South acquisition.
- Effects of debit-card interchange regulation, mortgage-volume trends and interest-rate movements on future non-interest income and margins.
- Liquidity after the reduction in cash and the continued repayment or refinancing of FHLB advances.