First Community Corporation — 2018 Q2 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company operating commercial and retail banking, mortgage banking, investment advisory and non-deposit businesses. This Form 10-Q covers the three and six months ended June 30, 2018. The results include the assets, liabilities and operations acquired in the October 20, 2017 Cornerstone Bancorp transaction.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $11.9 million | $9.7 million | $23.0 million | $18.7 million |
| Net interest income | $8.9 million | $7.0 million | $17.5 million | $14.1 million |
| Provision for loan losses | $29 thousand | $78 thousand | $231 thousand | $194 thousand |
| Non-interest income | $2.9 million | $2.6 million | $5.5 million | $4.6 million |
| Non-interest expense | $8.2 million | $7.4 million | $15.8 million | $14.1 million |
| Net income | $3.0 million | $1.7 million | $5.7 million | $3.4 million |
| Diluted EPS | $0.39 | $0.24 | $0.74 | $0.50 |
- Tax-equivalent net interest margin was 3.71% in Q2 and 3.69% for the first six months, compared with 3.49% and 3.51%, respectively, in the prior-year periods.
- Effective tax rate was 18.0% for the first six months, compared with 23.1% in 2017, primarily reflecting the Tax Cuts and Jobs Act and a purchased South Carolina rehabilitation tax credit.
- Total assets were $1.092 billion at June 30, 2018, up from $1.051 billion at December 31, 2017. Gross loans increased to $684.3 million from $646.8 million, while deposits increased to $933.4 million from $888.3 million.
- Shareholders’ equity was $107.0 million, or 9.8% of assets, versus $105.7 million, or 10.1%, at year-end 2017.
- Cash and cash equivalents were $44.9 million at June 30, 2018, compared with $30.6 million at December 31, 2017. Net cash provided by operating activities was $6.6 million; investing activities used $30.8 million; and financing activities provided $38.6 million.
- The loan-to-deposit ratio was 74.1%, compared with 73.4% at December 31, 2017. Investment securities totaled $271.8 million, including $255.5 million of available-for-sale securities and $16.3 million of held-to-maturity securities.
- Borrowings consisted principally of $28.2 million in securities sold under agreements to repurchase, $14.96 million in junior subordinated debt and $241 thousand in FHLB advances.
Material changes versus the prior comparable period
- Six-month net income increased 67% to $5.7 million, and Q2 net income increased 80% to $3.0 million. Results benefited materially from the Cornerstone acquisition, organic loan growth and improved net interest margin.
- Average earning assets increased by $131.8 million in the first half and $143.6 million in Q2, while loans represented a larger share of earning assets.
- Non-interest income increased $920 thousand for the first six months, led by higher deposit service charges, investment advisory fees, mortgage banking income and other customer activity fees.
- Non-interest expense increased $1.7 million for the first six months, primarily from acquired employees and facilities, higher salaries and benefits, amortization of Cornerstone core deposit intangibles and higher data-processing costs following the outsourcing of core processing.
- Mortgage banking income declined $238 thousand in Q2 despite slightly higher mortgage production, reflecting lower average production margins.
- Accumulated other comprehensive loss increased to $3.5 million from $444 thousand at year-end, primarily due to unrealized losses on available-for-sale securities. Six-month comprehensive income was $2.6 million versus $4.5 million in 2017.
- The allowance for loan losses increased to $6.1 million from $5.8 million, while the allowance-to-loans ratio declined to 0.89% from 0.90%.
Outlook, risks, contingencies and unusual items
- Management stated that liquidity and capital are adequate for operating and loan-funding needs and expects the Company and Bank to remain well capitalized for at least the next 12 months.
- The Bank’s June 30 capital ratios were 9.8% leverage, 13.2% Tier 1 and 13.9% total risk-based capital. The Company’s corresponding ratios were 10.2%, 13.8% and 14.5%.
- Management expects an effective tax rate of approximately 20.0% to 20.5% for the remainder of 2018, based on tax-exempt securities, bank-owned life insurance and other factors.
- At June 30, non-performing assets were $5.7 million, or 0.53% of total assets, versus $5.3 million, or 0.51%, at year-end. Non-accrual loans were $3.0 million, and $959 thousand of construction loans were more than 90 days past due but still accruing interest.
- Approximately 91.2% of loans were collateralized by real estate, creating sensitivity to real estate values, local economic conditions and borrower cash flows. Commercial mortgage loans represented 71.0% of gross loans.
- Management identified interest-rate risk, credit losses, funding and deposit flows, regulatory requirements, cybersecurity, technology, merger integration and general economic conditions as significant risks. The Company is asset sensitive within one year; modeled net interest income would decline under both rising and falling rate scenarios, with the largest modeled decline under a 200-basis-point decrease.
- The Company had $128.5 million of commitments to extend credit, including $38.6 million of unused home-equity lines. Management reported no material pending legal proceedings and no subsequent events requiring disclosure.
- Adoption of the 2018 revenue-recognition and financial-instruments standards did not materially affect the financial statements. The Company was evaluating the future credit-loss and lease standards.
Facts investors should verify
- Whether loan growth, particularly commercial real estate growth, remains consistent with underwriting standards and whether non-performing assets continue to trend upward or normalize.
- The adequacy of the $6.1 million allowance relative to the real-estate concentration, construction loans and future economic conditions.
- The sustainability of the 3.69% tax-equivalent net interest margin as deposit costs rise and interest rates change.
- The recurring versus acquisition-related components of expense growth, including data processing, compensation and core deposit intangible amortization.
- The effect of unrealized securities losses on capital, liquidity and future comprehensive income.
- The completion and financial impact of Cornerstone integration, including deposit retention, cost synergies and customer or employee attrition.
- The availability and terms of unused funding sources, credit commitments and regulatory capital capacity.