First Community Corporation — 2016 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 unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods; balance-sheet comparisons are primarily with December 31, 2015.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|
| Total interest income | $7.459 million | $7.049 million | $14.596 million | $14.332 million |
| Net interest income | $6.677 million | $6.204 million | $13.014 million | $12.652 million |
| Provision for loan losses | $217 thousand | $391 thousand | $357 thousand | $797 thousand |
| Non-interest income | $2.264 million | $2.565 million | $4.353 million | $4.546 million |
| Non-interest expense | $6.333 million | $6.389 million | $12.675 million | $12.489 million |
| Net income | $1.745 million | $1.443 million | $3.213 million | $2.847 million |
| Diluted EPS | $0.26 | $0.22 | $0.47 | $0.43 |
- Six-month net income increased approximately 12.8%; second-quarter net income increased approximately 20.9%.
- Six-month net interest income increased approximately 2.9%, while the tax-equivalent net interest margin declined to 3.67% from 3.82% in the comparable 2015 period. The reported net interest margin was 3.27% versus 3.38% on an FTE basis.
- Second-quarter tax-equivalent net interest margin was 3.43%, compared with 3.34% in the second quarter of 2015; management stated that the margin would have been approximately 3.38% excluding an $82 thousand discount recognized on a called investment.
- Average earning assets increased to $800.6 million for the first six months, from $755.9 million, and to $808.7 million in the second quarter, from $766.0 million.
- The allowance for loan losses was $4.877 million, or 0.95% of gross loans, at June 30, 2016, compared with $4.596 million, or 0.94%, at year-end 2015. Net charge-offs were $76 thousand for the six months.
Financial Position, Debt and Liquidity
| Balance-sheet metric | June 30, 2016 | December 31, 2015 |
|---|
| Total assets | $888.837 million | $862.734 million |
| Gross loans | $511.303 million | $489.191 million |
| Net loans | $506.426 million | $484.595 million |
| Investment securities | $284.598 million | $282.058 million |
| Total deposits | $729.623 million | $716.151 million |
| FHLB advances | $32.445 million | $24.788 million |
| Junior subordinated debt | $14.964 million | $14.964 million |
| Shareholders’ equity | $84.211 million | $79.038 million |
- Loans increased $22.1 million, or approximately 4.5%, during the first half; total loan production was $66.1 million.
- Deposits increased $13.5 million, and the loan-to-deposit ratio rose to 71.1% from 68.7%.
- Cash and cash equivalents were $22.295 million at June 30, 2016. Six-month operating cash flow was $705 thousand, investing cash flow was negative $21.294 million, and financing cash flow was $19.943 million, resulting in a $646 thousand decrease in cash.
- Management stated that liquidity was adequate. Interest-bearing bank balances, federal funds sold and available-for-sale securities represented 31.2% of total assets. The company had $20.0 million of unused federal funds lines and access to an FHLB line of credit of up to 25% of bank assets.
- The Bank’s June 30, 2016 leverage, Tier 1, total risk-based and CET1 ratios were 9.8%, 14.6%, 15.5% and 14.6%, respectively. Company ratios were 10.2%, 15.3%, 16.1% and 12.8%, respectively. Management expected the Bank and Company to remain well-capitalized for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Profitability improved primarily from higher net interest income, lower loan-loss provisions and modestly lower second-quarter operating expenses.
- Non-interest income declined because of lower mortgage banking income, investment advisory fees and securities-sale gains. Mortgage banking income was affected by the resignation of a mortgage loan producer.
- Six-month non-interest expense increased 1.5%, driven principally by salaries and benefits, the Greenville loan production office, debit-card activity and fraud-related costs. The company also incurred approximately $64 thousand for EMV card reissuance and approximately $23 thousand for a bill-pay system conversion.
- Non-performing assets declined to $5.895 million, or 0.66% of total assets, from $7.3 million, or 0.85%, at December 31, 2015. Nonaccrual loans were $4.502 million, and loans more than 90 days past due and still accruing were $38 thousand.
- Accumulated other comprehensive income increased to $3.843 million from $830 thousand, primarily due to after-tax unrealized gains on available-for-sale securities.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management expected the effective tax rate to remain approximately 26.0% to 27.0% during the remainder of 2016.
- Management intended to support margin performance through continued loan growth and a shift in the asset mix from investments toward loans, but noted that historically low rates and a potentially flattening yield curve limit further reductions in funding costs.
- Management identified real-estate concentration, declining collateral values, credit losses, allowance adequacy, regulatory examinations, interest-rate changes, deposit flows, funding access, competition, cybersecurity, economic conditions and regulatory or accounting changes as material risks.
- At June 30, 2016, the company had $74.7 million of commitments to extend credit, including $30.7 million of unused home-equity lines. These commitments are subject to normal underwriting and collateral practices.
- The company had $1.1 million of current loans identified as a potential problem relationship, although the balance was not classified as non-performing.
- Management reported no material subsequent events requiring accrual or disclosure and no material pending legal proceeding expected to adversely affect financial position, results or cash flows.
Important Facts for Investors to Verify
- Confirm the sustainability of loan growth and whether the higher loan mix offsets pressure on loan yields and net interest margins.
- Review commercial real-estate concentration, criticized loans, nonaccrual trends and the adequacy of the $4.877 million allowance.
- Assess the effect of interest-rate changes on net interest income; management’s modeled change was negative 4.60% under a hypothetical 200-basis-point decline.
- Monitor deposit growth, the increased use of FHLB advances and the company’s ability to maintain liquidity as loans expand.
- Evaluate the recurring nature of non-interest income and the effect of debit-card fraud, EMV conversion costs, marketing timing and the Greenville office on future expenses.
- Verify regulatory capital ratios, dividend capacity and any subsequent regulatory or accounting developments, including the future credit-loss standard.
