First Community Corporation: Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company operating primarily through First Community Bank. This unaudited Form 10-Q covers the quarter ended March 31, 2015, with comparisons to the quarter ended March 31, 2014 and the December 31, 2014 balance sheet. The company derives most revenue from interest on loans and investments, funded primarily by deposits.
Key Financial Metrics
| Metric | Q1 2015 | Comparable / Prior Period |
|---|---|---|
| Total assets | $835.8 million | $812.4 million at December 31, 2014 |
| Gross loans | $454.3 million | $443.8 million at December 31, 2014; $443.9 million at March 31, 2014 |
| Deposits | $694.6 million | $669.6 million at December 31, 2014 |
| Net interest income | $6.4 million | $5.5 million in Q1 2014 |
| Non-interest income | $2.0 million | $1.9 million in Q1 2014 |
| Net income | $1.4 million | $862 thousand in Q1 2014 |
| Diluted earnings per share | $0.21 | $0.14 in Q1 2014 |
| Tax-equivalent net interest margin | 3.62% | 3.40% in Q1 2014 |
| Cash flow from operating activities | $1.2 million | $2.0 million in Q1 2014 |
| Cash flow from investing activities | $(2.0) million | $(5.1) million in Q1 2014 |
| Cash flow from financing activities | $22.6 million | $26.1 million in Q1 2014 |
| Cash and cash equivalents | $44.2 million | $22.5 million at December 31, 2014 |
Net income increased approximately 63% year over year. Net income before tax was $1.9 million, compared with $1.2 million in Q1 2014. The reported effective tax rate was 27.0%, versus 27.9% in the prior-year quarter.
Net interest income benefited from higher average earning assets, which increased to $744.0 million from $671.6 million. Management reported that approximately 22 basis points of the 3.62% net interest margin resulted from payoffs of two purchased impaired loans; excluding that effect, the margin was approximately 3.40%.
The allowance for loan losses was $4.3 million, or 0.94% of gross loans, compared with $4.1 million, or 0.93%, at December 31, 2014. Provision expense increased to $406 thousand from $150 thousand, while net charge-offs increased to $286 thousand from $208 thousand.
Total debt and other borrowings at March 31, 2015 included $27.6 million of Federal Home Loan Bank advances, $16.7 million of securities sold under repurchase agreements, and $15.5 million of junior subordinated debt. Shareholders’ equity was $76.5 million, or 9.2% of total assets.
Material Changes Versus Prior Comparable Period
- Net interest income increased $952 thousand, primarily because the Savannah River acquisition contributed for the full quarter in 2015 versus only 59 days in Q1 2014.
- Q1 2014 included $420 thousand of Savannah River merger expenses; no merger expenses were recorded in Q1 2015.
- Mortgage banking income increased $116 thousand, and investment advisory and non-deposit commissions increased $39 thousand.
- A $104 thousand gain on securities sales was substantially offset by a $103 thousand loss on the early extinguishment of $2.7 million of FHLB advances.
- Non-interest expense increased modestly to $6.1 million from $6.0 million. Salary, occupancy, equipment, marketing, and intangible amortization expenses increased, partly reflecting the acquisitions and a marketing campaign.
- Gross loans increased $10.5 million, or approximately 2.4%, from December 31, 2014. Construction loans increased to $36.1 million from $27.5 million, while commercial mortgage loans increased modestly to $294.1 million.
- Deposits increased $25.0 million during the quarter. Management stated that approximately $12.0 million of the increase arrived on the final day of the quarter and was transferred out shortly afterward.
- Non-performing assets declined to $8.7 million, or 1.04% of total assets, from $9.5 million, or 1.17%, at year-end 2014. Nonaccrual loans declined to $5.9 million from $6.6 million.
Outlook, Risks, Contingencies, and Unusual Items
Management did not provide specific quantitative earnings guidance. It expects the effective tax rate to remain between 27.0% and 29.0% for the remainder of 2015 and believes liquidity and capital will be sufficient to fund operations for at least the next 12 months.
The Bank entered into an FDIC Consent Order on February 18, 2015 concerning Bank Secrecy Act and anti-money-laundering compliance. Required actions include enhancing risk assessments, internal controls, and employee training. Management believes substantially all identified issues have been addressed, but the FDIC could impose additional requirements, restrictions, enhanced supervision, or civil money penalties if it determines that progress is insufficient.
The loan portfolio is heavily concentrated in real estate-secured lending, including $294.1 million of commercial mortgage loans. Management identified declining real estate values, unemployment, borrower payment behavior, credit losses, allowance adequacy, interest-rate changes, deposit flows, funding access, regulatory requirements, cybersecurity, competition, and economic conditions as key risks.
At March 31, 2015, the company had $79.3 million of commitments to extend credit, including $30.6 million of unused home equity lines. It maintained $20.0 million of unused federal funds lines and a $10.0 million repurchase line. The FHLB of Atlanta had approved borrowing capacity of up to 25% of bank assets, subject to collateral requirements.
The company and bank met or exceeded Basel III capital requirements on a fully phased-in basis. The Bank’s March 31, 2015 leverage, Tier 1, total capital, and CET1 ratios were 9.8%, 15.3%, 16.1%, and 15.3%, respectively. The Company’s corresponding ratios were 10.1%, 15.9%, 16.8%, and 13.1%.
Management stated that no material subsequent events occurred after March 31, 2015 and that disclosure controls were effective. The filing reports no material pending legal proceedings.
Important Facts for Investors to Verify
- Whether the Bank satisfies all requirements of the FDIC Consent Order and avoids additional regulatory actions or penalties.
- Whether the increase in net interest margin persists after the temporary benefit from purchased impaired loan payoffs.
- Trends in commercial real estate exposure, construction lending, nonaccrual loans, impaired loans, charge-offs, and provision expense.
- The sustainability and quality of deposit growth, particularly the portion of quarter-end deposits that subsequently left the Bank.
- Liquidity availability under federal funds, repurchase, and FHLB facilities and the collateral requirements for those sources.
- Whether capital ratios remain well above regulatory minimums as the Basel III capital conservation buffer phases in.
- Potential effects of interest-rate changes on net interest income; management estimated a 4.92% increase under a 200-basis-point rise and a 9.83% decrease under a 200-basis-point decline.
- Whether securities portfolio unrealized gains and losses, real estate collateral values, and other Level 3 fair value estimates change materially.