Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company for First Community Bank, serving small and midsized businesses, professionals and individuals across South Carolina and Augusta, Georgia. The Form 10-K covers the fiscal year ended December 31, 2014; fourth-quarter information is unaudited.
- Operations included 14 full-service offices following the February 2014 acquisition of Savannah River Financial Corporation, which added branches in Aiken, South Carolina and Augusta, Georgia.
- In September 2014, the Bank acquired approximately $40.0 million of deposits and $8.7 million of loans from First South Bank and paid a $714 thousand premium.
Financial Performance and Position
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets | $812.4 million | $633.3 million |
| Loans, excluding loans held for sale | $443.8 million | $347.6 million |
| Total deposits | $669.6 million | $497.1 million |
| Net interest income | $23.7 million | $18.0 million |
| Provision for loan losses | $881 thousand | $528 thousand |
| Non-interest income | $8.2 million | $8.2 million |
| Non-interest expense | $24.0 million | $20.4 million |
| Net income | $5.1 million | $4.1 million |
| Diluted EPS | $0.78 | $0.78 |
| Net interest margin, tax equivalent | 3.40% | 3.18% |
| Return on average assets | 0.73% | 0.66% |
| Return on average common equity | 8.13% | 7.68% |
- Fourth-quarter 2014 net income was $1.5 million, or $0.22 diluted EPS, compared with $850 thousand, or $0.16 diluted EPS, in fourth-quarter 2013.
- 2014 operating cash flow was $12.0 million, compared with $16.3 million in 2013. Investing activities used $35.2 million, primarily reflecting purchases of investment securities and acquisitions; financing activities provided $31.6 million.
- Cash and cash equivalents increased to $22.5 million from $14.2 million.
- Shareholders’ equity increased to $74.5 million from $52.7 million, partly from issuing 1.274 million shares in the Savannah River transaction and positive changes in accumulated other comprehensive income.
- Federal Home Loan Bank advances declined to $28.8 million from $43.3 million. Junior subordinated debt was $15.5 million and repurchase agreements were $17.4 million.
- The Bank was well capitalized. At year-end, Bank Tier 1 risk-based capital was 15.39%, total risk-based capital was 16.21% and leverage was 9.56%.
Material Changes Versus the Prior Comparable Period
- Net income increased approximately 24% because net interest income rose $5.7 million, driven by a $133.0 million increase in average earning assets and expansion of the tax-equivalent net interest margin.
- Average loans increased to $439.2 million from $344.1 million, while average securities increased to $256.4 million from $223.5 million.
- Interest expense declined to $3.6 million from $3.7 million as the average cost of interest-bearing liabilities fell to 0.62% from 0.81%.
- Non-interest expense rose $3.5 million, primarily due to the Savannah River acquisition, additional employees and branch-related costs. The efficiency ratio improved to 74.14% from 76.69%.
- Mortgage banking income declined $581 thousand to $3.2 million because higher interest rates reduced refinancing activity. Investment advisory fees and non-deposit commissions increased $296 thousand.
- Asset quality improved on several measures: non-performing assets declined to 1.17% of total assets from 1.39%, and net charge-offs declined to 0.22% of average loans from 0.27%. However, non-accrual loans increased to $6.6 million from $5.4 million, and impaired loans increased to $8.6 million from $6.0 million.
- The allowance for loan losses decreased to $4.1 million, or 0.93% of loans, from $4.2 million, or 1.21%, despite higher loan balances.
- The loan portfolio remained concentrated in commercial real estate: commercial real estate and construction loans totaled approximately $314.4 million, or 70.8% of loans.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings or revenue guidance. It stated that the existing core deposit base and available borrowing capacity should meet short- and long-term liquidity needs and expected the Bank to remain well capitalized for at least the next 12 months.
- Management estimated a 2015 effective tax rate of 28% to 32%. The 2013 federal net operating loss carryforward was fully utilized in 2014.
- Basel III capital rules became effective January 1, 2015. Management believed the Company and Bank would have met the fully phased-in requirements as of December 31, 2014.
- On February 18, 2015, the Bank entered into an FDIC Consent Order concerning Bank Secrecy Act and anti-money-laundering compliance. Required actions include strengthening risk assessments, internal controls and training. Failure to satisfy the order could result in additional restrictions, enhanced supervision or civil money penalties.
- Key risks include commercial real estate and other real-estate concentration, credit losses, changing interest rates, deposit competition, regulatory requirements, cybersecurity, reliance on local economies and potential acquisition-integration risks.
- The Company recorded a $351 thousand loss on early extinguishment of debt from prepaying Federal Home Loan Bank advances and incurred $503 thousand of merger expenses. No other-than-temporary impairment charges were recorded on securities in 2014.
- The Company maintained $75.8 million of commitments to extend credit at year-end, compared with $45.5 million in 2013; commitments may expire without being drawn.
Most Important Facts to Verify
- Whether the Bank satisfies all requirements of the FDIC Consent Order and avoids additional regulatory actions or penalties.
- Whether commercial real estate exposure, non-accrual loans and impaired loans remain controlled as the loan portfolio grows.
- Whether the $4.1 million allowance for loan losses is adequate relative to loan growth, collateral values and regulatory review.
- Whether net interest margin benefits persist if interest rates change, particularly given the Company’s reported asset-sensitive position.
- Whether Savannah River and First South acquisitions deliver expected revenue synergies without continued disproportionate expense growth.
- Whether liquidity, deposit stability and capital ratios remain sufficient after Basel III implementation and potential future growth.