First Community Corporation — 2015 Q2 Form 10-Q Summary
Business Context and Reporting Period
First Community Corporation is a South Carolina-based bank holding company for First Community Bank, serving businesses, professionals and individuals through community banking, mortgage banking and investment advisory activities. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared primarily with the same periods in 2014 and, for balance-sheet measures, December 31, 2014.
Financial Highlights
| Metric | Six months ended June 30, 2015 | Comparable period or date |
|---|---|---|
| Net income | $2.847 million | $2.063 million in 2014 |
| Diluted earnings per share | $0.43 | $0.32 in 2014 |
| Net interest income | $12.652 million | $11.443 million in 2014 |
| Non-interest income | $4.546 million | $3.774 million in 2014 |
| Provision for loan losses | $797 thousand | $550 thousand in 2014 |
| Non-interest expense | $12.489 million | $11.811 million in 2014 |
| Net interest margin, tax-equivalent FTE basis | 3.47% | 3.39% in 2014 |
| Net cash provided by operating activities | $3.289 million | $6.526 million in 2014 |
| Cash and cash equivalents at June 30 | $25.876 million | $29.752 million at June 30, 2014 |
| Total assets | $836.406 million | $812.363 million at December 31, 2014 |
| Gross loans | $474.016 million | $443.844 million at December 31, 2014 |
| Total deposits | $684.032 million | $669.583 million at December 31, 2014 |
| Shareholders’ equity | $76.411 million | $74.528 million at December 31, 2014 |
Second-quarter net income was $1.443 million, or $0.22 diluted EPS, versus $1.201 million, or $0.18 diluted EPS, in the second quarter of 2014. The filing does not present a single consolidated revenue figure; net interest income plus non-interest income totaled approximately $17.2 million for the first six months of 2015.
Gross loans increased approximately 6.8% from year-end 2014, while deposits increased 2.2%. The loan-to-deposit ratio rose to 70.3% from 66.9%. Investment securities declined to $271.2 million from $282.8 million. Loans were concentrated in commercial real estate, which represented 66.6% of gross loans at June 30, 2015.
The allowance for loan losses was $4.281 million, or 0.90% of total loans, compared with $4.132 million, or 0.93%, at year-end. Net charge-offs were $648 thousand, and non-performing assets were $7.872 million, or 0.94% of total assets, compared with $9.5 million, or 1.17%, at December 31, 2014.
Total liabilities included $35.548 million of Federal Home Loan Bank advances, $19.460 million of securities sold under repurchase agreements and $15.464 million of junior subordinated debt. The filing states that liquidity was adequate. Interest-bearing bank balances, federal funds sold and available-for-sale securities represented 32.1% of total assets at June 30, 2015.
At June 30, 2015, the Bank reported a 9.8% leverage ratio, 15.0% Tier 1 risk-based capital ratio, 15.8% total risk-based capital ratio and 15.0% CET1 ratio. The Company reported corresponding leverage, Tier 1 and total risk-based capital ratios of 10.4%, 15.7% and 16.6%, with a 12.4% CET1 ratio. Management stated that the Bank and Company met or exceeded required ratios and expected to remain well capitalized for at least the next 12 months.
Material Changes Versus Prior Comparable Period
- Six-month net income increased 38.0%, primarily from higher average earning assets, organic loan growth, the full-period contribution of the 2014 Savannah River acquisition and the absence of 2014 merger expenses.
- Net interest income increased 10.6%. Average earning assets rose to $755.9 million from $695.5 million, and the tax-equivalent net interest margin increased to 3.47% from 3.39%.
- Second-quarter net interest margin declined to 3.34% from 3.38%, reflecting pressure from historically low interest rates, although growth in earning assets supported higher net interest income.
- Non-interest income increased 20.5%, led by higher mortgage banking income, investment advisory fees and gains on securities sales.
- Non-interest expense increased 5.7%, reflecting higher salaries, occupancy, equipment, marketing and intangible amortization costs. The prior-year period included $435 thousand of merger and acquisition expense; none was recorded in 2015.
- The loan-loss provision increased 44.9% for the first six months, while net charge-offs declined modestly and non-performing assets improved from year-end.
- Operating cash flow declined, while investing cash outflows increased to $22.278 million, mainly because of loan growth and investment-security purchases. Financing activities provided $22.333 million, principally from deposit growth and net FHLB borrowing.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management expects an effective tax rate of approximately 27.0% to 30.0% for the remainder of 2015 and anticipates lower marketing expense in the second half.
- The Bank entered into an FDIC Consent Order in February 2015 concerning Bank Secrecy Act and anti-money-laundering controls, risk assessments, internal controls and training. Management believes the Bank is currently compliant, but the FDIC could impose additional requirements, restrictions, supervision or civil money penalties if progress is deemed insufficient.
- Management identified real-estate collateral concentration, possible declines in real-estate values, credit losses, loan-growth seasoning, allowance adequacy, regulatory examinations, funding access, interest-rate changes, deposit flows, cybersecurity and competitive pressures as material risks.
- The Company was asset sensitive within one year. Modeling estimated that a 200-basis-point increase in short-term rates would increase projected 12-month net interest income by 2.76%, while a 200-basis-point decline would reduce it by 11.43%.
- The Company had $75.7 million of commitments to extend credit, including $30.9 million of unused home-equity lines. These commitments create potential future funding and credit exposure.
- Non-interest expense included a $100 thousand writedown of land held for sale. The property was under contract and expected to close in the fourth quarter of 2015, with no additional material costs expected under the contract.
- Unrealized losses on available-for-sale securities reduced other comprehensive income by $319 thousand for the first six months. Management did not consider the securities portfolio other-than-temporarily impaired.
- Management reported no material pending legal proceedings, no material subsequent events requiring disclosure and effective disclosure controls. Risk Factors were not separately updated in Part II.
Most Important Facts for Investors to Verify
- Whether the FDIC determines that the Bank has fully satisfied the Consent Order and whether any additional regulatory actions or penalties arise.
- Whether commercial real-estate concentration and collateral values lead to higher provisions, charge-offs or allowance requirements.
- Whether loan and deposit growth can continue without materially increasing funding costs or liquidity risk.
- Whether mortgage banking and investment advisory growth is recurring and sufficient to offset pressure on the net interest margin.
- Whether the stated capital ratios remain above regulatory and “well-capitalized” thresholds as the Basel III capital conservation buffer phases in.
- The sustainability of operating cash generation given continued loan growth, investment activity and reliance on deposits and wholesale funding.