First Community Corporation — Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company whose principal business is commercial and retail banking through First Community Bank. It also operates mortgage banking and investment advisory and non-deposit businesses. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods, and financial position at September 30, 2016 compared with December 31, 2015. The company had 6,703,317 common shares outstanding as of November 10, 2016.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net interest income | $6.651 million | $6.253 million | $19.665 million | $18.905 million |
| Provision for loan losses | $179 thousand | $193 thousand | $536 thousand | $990 thousand |
| Non-interest income | $2.387 million | $2.329 million | $6.740 million | $6.875 million |
| Non-interest expense | $6.583 million | $6.067 million | $19.258 million | $18.556 million |
| Net income | $1.677 million | $1.679 million | $4.890 million | $4.526 million |
| Diluted EPS | $0.25 | $0.25 | $0.72 | $0.68 |
| Net interest margin | 3.19% | 3.22% | 3.24% | 3.33% |
- Total assets were $915.3 million, up $52.6 million from December 31, 2015. Gross loans increased to $523.4 million from $489.2 million, while net loans were $518.4 million.
- Deposits increased to $765.9 million from $716.2 million. The loan-to-deposit ratio was 68.9%, compared with 68.7% at year-end 2015.
- Investment securities totaled $286.5 million, including $269.3 million available-for-sale and $17.2 million held-to-maturity.
- Cash and cash equivalents at September 30, 2016 were $38.7 million. Operating activities provided $8.1 million of cash, investing activities used $37.3 million, and financing activities provided $44.9 million during the first nine months.
- Total liabilities were $831.0 million and shareholders’ equity was $84.2 million, or 9.2% of total assets. Borrowings included $21.0 million of Federal Home Loan Bank advances, $22.2 million of repurchase-agreement borrowings, and $15.0 million of junior subordinated debt.
- The allowance for loan losses was $5.0 million, or 0.96% of gross loans, compared with $4.6 million, or 0.94%, at December 31, 2015. Net charge-offs were $85 thousand for the first nine months.
- Non-performing assets were $5.2 million, or 0.57% of total assets, down from $7.3 million, or 0.85%, at December 31, 2015. Nonaccrual loans were $3.9 million, and loans more than 90 days past due and still accruing were $99 thousand.
- The Bank’s September 30, 2016 capital ratios were 9.7% leverage, 14.4% Tier 1, 15.3% total risk-based capital, and 14.4% Common Equity Tier 1. Management expected the Bank and company to remain well capitalized for at least the next 12 months.
Material changes versus prior comparable periods
- Nine-month net income increased 8.0% to $4.9 million, while diluted EPS rose to $0.72 from $0.68. Third-quarter net income was essentially unchanged.
- Nine-month net interest income increased $760 thousand, driven by higher average earning assets, but the net interest margin declined nine basis points to 3.24%. Average loan yield also declined, while the cost of interest-bearing liabilities improved to 0.50% from 0.56%.
- Nine-month loan-loss provision expense declined $454 thousand, and net charge-offs fell to $85 thousand from $654 thousand. The allowance nonetheless increased because of loan growth and management’s assessment of portfolio risk.
- Nine-month non-interest income declined $135 thousand. Lower mortgage banking income and investment advisory fees more than offset higher securities-sale gains and other income.
- Nine-month non-interest expense increased $702 thousand, principally from higher salaries and benefits, additional Greenville loan production office staff, occupancy costs, card activity and fraud-related expenses.
- Loans increased 7.0% from year-end 2015, led by commercial mortgage loans, while deposits grew 6.9%. FHLB advances declined $3.8 million after term-advance repayments.
- Accumulated other comprehensive income increased to $2.5 million from $0.8 million, primarily reflecting unrealized gains on available-for-sale securities. Nine-month comprehensive income was $6.6 million.
Guidance, outlook, risks and unusual items
- Management did not provide formal earnings or revenue guidance. It expected the effective tax rate to remain approximately 26% to 27% during the remainder of 2016.
- Management stated that liquidity was adequate for operating and loan-funding requirements. Interest-bearing bank balances, federal funds sold and available-for-sale securities represented 32.1% of total assets. The company also maintained $20.0 million of federal funds purchased lines and access to an FHLB credit line of up to 25% of Bank assets.
- At September 30, 2016, the company had $81.0 million of commitments to extend credit, including $31.0 million of unused home equity lines. These commitments create potential future funding and credit exposure.
- Interest-rate risk remains material. Management reported that a hypothetical 200-basis-point increase in short-term rates would increase modeled net interest income by 2.12%, while a 200-basis-point decrease would reduce it by 4.57%.
- The loan portfolio is heavily concentrated in real estate, including $354.1 million of commercial mortgage loans. Declines in real estate values, borrower payment problems, unemployment or broader economic deterioration could increase credit losses and required provisions.
- Notable items included $601 thousand of nine-month gains on securities sales and a $459 thousand loss from early extinguishment of debt, primarily reflecting prepayment penalties on FHLB advances. The third quarter included $478 thousand of securities-sale gains and the $459 thousand debt-extinguishment loss.
- Management identified cybersecurity, fraud, competition, deposit flows, funding access, regulatory requirements, accounting changes and interest-rate movements as additional risks. No material legal proceedings or subsequent events requiring disclosure were reported.
Important facts for investors to verify
- Whether loan growth, particularly commercial real estate growth, remains consistent with asset-quality trends and risk limits.
- Whether non-performing assets and delinquency levels continue to improve and whether the allowance remains adequate under changing real estate and economic conditions.
- Whether net interest margin pressure persists in the low-rate environment or changes materially as rates and the yield curve move.
- The sustainability of securities-sale gains, mortgage banking income and other non-interest revenue relative to recurring operating expenses.
- Deposit retention, reliance on FHLB advances and other wholesale funding, and available liquidity under stressed conditions.
- The effect of the $81.0 million of unfunded lending commitments and the company’s regulatory capital and dividend capacity.