First Community Corporation — Q2 2011 Form 10-Q Summary
Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company operating through First Community Bank, N.A. The filing covers the quarter and six months ended June 30, 2011, compared primarily with the corresponding 2010 periods and December 31, 2010. The company reported 3,277,454 common shares outstanding as of August 5, 2011.
Financial Performance and Position
| Metric | Q2 2011 | Six Months 2011 | Comparable Period |
|---|---|---|---|
| Net income | $726 thousand | $1.296 million | Q2 2010: $475 thousand; six months 2010: $1.064 million |
| Net income available to common shareholders | $558 thousand | $961 thousand | Q2 2010: $309 thousand; six months 2010: $732 thousand |
| Diluted EPS | $0.17 | $0.29 | Q2 2010: $0.10; six months 2010: $0.23 |
| Net interest income | $4.619 million | $9.073 million | Q2 2010: $4.465 million; six months 2010: $9.172 million |
| Net interest margin | 3.37% tax-equivalent basis | 3.34% tax-equivalent basis | Q2 2010: 3.25%; six months 2010: 3.36% |
| Provision for loan losses | $390 thousand | $750 thousand | Q2 2010: $580 thousand; six months 2010: $1.130 million |
| Non-interest income | $1.218 million | $2.598 million | Q2 2010: $980 thousand; six months 2010: $1.839 million |
| Non-interest expense | $4.427 million | $9.103 million | Q2 2010: $4.256 million; six months 2010: $8.479 million |
At June 30, 2011, total assets were $605.2 million, compared with $599.0 million at year-end 2010. Gross loans were $325.7 million, or $326.3 million including loans held for sale, compared with $330.0 million at year-end. Investment securities were $204.5 million at fair value, deposits were $470.9 million, and shareholders’ equity was $43.9 million, or 7.3% of assets.
Cash and cash equivalents were $21.6 million at June 30, 2011, compared with $26.5 million at December 31, 2010. Six-month operating cash flow was $4.0 million. Investing activities used $12.9 million, primarily reflecting net investment-security purchases, while financing activities provided $4.0 million, including $15.6 million of deposit growth and $13.9 million of FHLB advance repayments.
The allowance for loan losses was $4.7 million, or 1.45% of total loans, compared with 1.49% at year-end 2010. Net charge-offs were $945 thousand for the first six months. Non-performing assets were $12.3 million, or 2.03% of total assets, including $3.3 million of nonaccrual loans and approximately $9.0 million of other real estate owned.
The Bank reported June 30 capital ratios of 8.75% leverage, 14.21% Tier 1 risk-based capital, and 15.49% total risk-based capital. The Company reported ratios of 8.98%, 14.57%, and 15.87%, respectively. Management stated that both entities remained well capitalized.
Material Changes Versus Prior Comparable Period
- Second-quarter net income increased 53% to $726 thousand, while six-month net income increased 22% to $1.296 million.
- Six-month net income benefited from a $380 thousand reduction in loan-loss provision and a $759 thousand increase in non-interest income, partly offset by a $624 thousand increase in non-interest expense.
- Net interest income declined $99 thousand for the first six months despite lower funding costs; average earning assets decreased to $549.2 million from $554.5 million.
- Quarterly net interest income and margin improved because funding costs fell faster than asset yields. Six-month asset yield declined to 4.74% from 5.10%, while the cost of interest-bearing liabilities fell to 1.63% from 2.02%.
- Non-interest income improved primarily because securities impairment charges and interest-rate-swap fair-value losses were substantially lower. Six-month OTTI expense fell to $4 thousand from $359 thousand.
- Deposits increased $15.6 million, with growth concentrated in non-interest-bearing, NOW, money-market, and savings accounts. The loan-to-deposit ratio declined to 69.3% from 72.5%.
- The company sold 14 non-agency mortgage-backed securities with approximately $29.8 million of book value, reducing below-investment-grade securities to $16.4 million from $39.0 million at December 31, 2010.
- Impaired loans declined to $6.3 million from $9.6 million, and nonaccrual loans declined to $3.3 million from $5.9 million. Other real estate owned increased to $9.0 million from $6.9 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected the 2011 effective tax rate to remain between 28% and 32%. It also expected the Bank and Company to remain well capitalized and exceed the OCC-imposed capital minimums for at least the next 12 months. No formal earnings or revenue guidance was provided.
The Bank remained subject to a formal written agreement with the OCC arising primarily from regulatory concerns regarding downgraded non-agency mortgage-backed securities. Management stated that the Bank was in substantial compliance, but failure to comply could result in additional regulatory or enforcement actions. The Company was also subject to a Federal Reserve memorandum of understanding requiring prior approval for specified dividends, debt, capital, and management actions.
The Company was evaluating conversion of the Bank from a national charter to a South Carolina state charter, subject to regulatory approval. Dividend payments remained subject to regulatory restrictions and approvals.
On July 29, 2011, the Bank agreed to acquire the assets and liabilities of Palmetto South Mortgage Corporation. The transaction became effective July 31, 2011, with an operating-asset purchase price of $22 thousand and contingent consideration ranging from zero to $1.2 million over three years; management estimated potential consideration of approximately $700 thousand.
Key risks include the concentration of commercial real estate loans, declining or uncertain real estate values, credit losses and charge-offs, adequacy of the loan-loss allowance, interest-rate sensitivity, funding costs, regulatory requirements, securities-market volatility, and potential reductions in debit-card interchange income under Dodd-Frank rules. The company was liability-sensitive within one year; modeled net interest income would increase 3.23% under an immediate 200-basis-point rate increase but decline 15.12% under a 200-basis-point decrease.
At June 30, 2011, the company had $42.2 million of commitments to extend credit, including $24.3 million of unused home-equity lines. Management stated that liquidity was adequate for operating and loan-funding needs, but noted that rapid growth, weaker asset quality, or poor earnings could change liquidity conditions.
Most Important Facts for Investors to Verify
- Whether the Bank continues to comply with the OCC formal agreement and its heightened capital requirements.
- Whether the Federal Reserve memorandum of understanding continues to restrict dividends, debt, share repurchases, and other corporate actions.
- The sustainability of improved credit metrics, particularly nonaccrual loans, classified loans, charge-offs, OREO, and the 1.45% loan-loss allowance ratio.
- Exposure to commercial real estate and remaining below-investment-grade or non-agency mortgage-backed securities.
- Whether lower funding costs and the improved second-quarter margin can offset declining asset yields and weak loan demand.
- The effect of the Palmetto South Mortgage acquisition and its contingent earn-out obligations.
- The future impact of debit-card interchange regulations, regulatory expenses, and potential changes in the Bank’s charter.