First Community Corporation: 2016 Q1 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 filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015, and financial position at March 31, 2016 versus December 31, 2015. The company had 6,693,042 common shares outstanding as of May 12, 2016.
The FDIC consent order relating to Bank Secrecy Act and anti-money-laundering matters was terminated on January 28, 2016. The Bank also expanded its Greenville, South Carolina loan production office with three commercial bankers.
Key Financial Metrics
| Metric | Q1 2016 | Comparable / Prior Period |
|---|---|---|
| Net income | $1.468 million | $1.404 million in Q1 2015 |
| Diluted earnings per share | $0.22 | $0.21 in Q1 2015 |
| Net interest income | $6.337 million | $6.448 million in Q1 2015 |
| Net interest margin, taxable equivalent | 3.33% | 3.62% in Q1 2015 |
| Non-interest income | $2.089 million | $1.981 million in Q1 2015 |
| Non-interest expense | $6.342 million | $6.100 million in Q1 2015 |
| Provision for loan losses | $140 thousand | $406 thousand in Q1 2015 |
| Net cash from operating activities | $2.822 million | $1.150 million in Q1 2015 |
| Total assets | $870.409 million | $862.734 million at December 31, 2015 |
| Gross loans | $494.021 million | $489.191 million at December 31, 2015 |
| Total deposits | $722.236 million | $716.151 million at December 31, 2015 |
| Shareholders’ equity | $81.611 million | $79.038 million at December 31, 2015 |
Net income increased approximately 4.6% year over year. Net interest income declined approximately 1.7%, while non-interest income increased approximately 5.5% and non-interest expense increased approximately 4.0%. The effective tax rate decreased to 24.5% from 27.0%, primarily due to tax-exempt income from bank-owned life insurance and tax-exempt securities.
Average earning assets increased to $792.1 million from $744.0 million, but the yield on earning assets declined to 3.62% from 3.97%. The cost of interest-bearing liabilities improved to 0.52% from 0.57%. Management reported a net interest spread of 3.10% and a reported net interest margin of 3.22%, compared with 3.40% and 3.51%, respectively, in Q1 2015.
Balance Sheet, Debt, Liquidity, and Capital
- Loans increased $4.8 million, or approximately 1.0%, during the quarter. Commercial mortgage loans represented 66.6% of gross loans, highlighting the company’s substantial commercial real estate exposure.
- Deposits increased $6.1 million, or approximately 0.8%. Non-interest-bearing deposits increased $7.1 million, while time deposits declined $4.0 million.
- Investment securities totaled approximately $284.1 million in carrying value, comprising $266.8 million of available-for-sale securities and $17.3 million of held-to-maturity securities.
- Debt included $24.4 million of Federal Home Loan Bank advances, $20.7 million of securities sold under repurchase agreements, and $15.0 million of junior subordinated debt.
- Cash and cash equivalents totaled $25.8 million at March 31, 2016, compared with $22.9 million at December 31, 2015. Net cash used in investing activities was $4.5 million, offset by $4.6 million of net cash from financing activities.
- Management stated that liquidity was adequate. Interest-bearing bank balances, federal funds sold, and available-for-sale securities represented 32.5% of total assets. The company also had $20.0 million of unused federal funds purchased lines and an FHLB credit line of up to 25% of Bank assets, subject to collateral requirements.
- Shareholders’ equity was 9.4% of total assets, compared with 9.2% at year-end 2015. The Bank’s March 31, 2016 leverage, Tier 1, total risk-based capital, and CET1 ratios were 9.8%, 14.8%, 15.6%, and 14.8%, respectively. The Company’s corresponding ratios were 10.2%, 15.4%, 16.2%, and 12.9%.
Asset Quality and Allowance
- The allowance for loan losses increased to $4.687 million from $4.596 million, equal to 0.95% of gross loans versus 0.94% at year-end.
- Net charge-offs were $49 thousand, compared with $286 thousand in Q1 2015. The provision declined to $140 thousand from $406 thousand.
- Non-accrual loans increased to $6.013 million from $4.839 million at December 31, 2015. Loans more than 90 days past due and still accruing totaled $32 thousand.
- Non-performing assets totaled approximately $7.5 million, or approximately 0.86% of total assets according to management; the allowance table reports 0.87%. Other real estate owned declined to $1.484 million from $2.458 million.
- Impaired loans increased to $8.045 million from $6.477 million. One $413 thousand commercial mortgage loan was restructured as a troubled debt restructuring during the quarter.
- Management identified approximately $422 thousand of current, substandard loans as a potential problem relationship. No loans were classified as doubtful.
Material Changes Versus the Prior Comparable Period
- Profitability improved modestly, primarily because of the lower loan-loss provision and lower income taxes.
- Net interest margin contracted 29 basis points, or approximately 8%, primarily because Q1 2015 benefited from approximately $420 thousand of income from two purchased-credit-impaired loan payoffs.
- Mortgage banking income decreased $70 thousand following the resignation of a mortgage producer. Gains on securities sales declined to $59 thousand from $104 thousand, although Q1 2015 also included a $103 thousand loss on early extinguishment of debt.
- Operating expenses increased due to higher salaries, Greenville office staffing, medical benefits, occupancy costs, debit-card reissuance and fraud-related costs. Marketing expense was lower because media campaign timing shifted into later quarters.
- Loans, deposits, total assets, and shareholders’ equity increased from year-end 2015, while non-accrual loans and impaired loans also increased.
Guidance, Outlook, Commentary, and Risks
The filing does not provide formal earnings or revenue guidance. Management expects the effective tax rate to remain approximately 26.0% to 27.0% for the remainder of 2016 and expects liquidity and capital to remain sufficient to fund operations for at least the next 12 months. Management stated that the Bank and Company are expected to remain well-capitalized over that period.
Management continues to pursue quality loan growth, core-deposit growth, mortgage banking expansion, and higher investment advisory revenue. The company is asset-sensitive within one year; its model estimated that a 200-basis-point increase in short-term rates would increase net interest income by 1.68%, while a 200-basis-point decrease would reduce it by 6.27%.
- Credit risk remains significant because a large portion of the loan portfolio is secured by real estate, particularly commercial real estate. Declining property values, borrower stress, unemployment, or higher interest rates could increase charge-offs and required provisions.
- Non-accrual loans and impaired loans increased during the quarter, and the adequacy of the allowance depends on collateral values, borrower cash flows, economic conditions, and management estimates.
- Interest-rate changes may pressure net interest margin and earnings. Competition, deposit outflows, funding access, regulatory requirements, cybersecurity incidents, technology changes, and adverse economic conditions are additional stated risks.
- The company had $77 million of commitments to extend credit, including $31 million of unused home-equity lines, exposing it to potential future funding and credit demands.
- Dividend payments may be constrained by bank holding company, bank, Federal Reserve, state, FDIC, and capital requirements.
- Management reported no material pending legal proceedings, no material subsequent events, and effective disclosure controls and procedures.
Important Facts for Investors to Verify
- Whether the increase in non-accrual and impaired loans continues and leads to higher provisions or charge-offs.
- Whether commercial real estate concentration and collateral values create additional credit exposure.
- Whether the lower net interest margin persists after the nonrecurring Q1 2015 purchased-loan payoff comparison.
- Whether deposit growth, core-deposit mix, and available borrowing capacity remain sufficient to support loan growth.
- Whether operating-cost increases, including staffing, technology, fraud, and marketing expenses, affect future efficiency and earnings.
- The precise regulatory capital ratios, allowance coverage, and non-performing asset ratio in subsequent filings, including the filing’s differing 0.86% and 0.87% presentations.