First Community Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2014. First Community Corporation is a community bank holding company whose primary earnings sources are loan and investment interest income, deposit funding, and fee-based services. The company completed its acquisition of Savannah River Financial Corporation on February 1, 2014; first-quarter results include the acquired operations for approximately 59 days.
Key financial metrics
| Metric | Q1 2014 | Comparable period or prior date |
|---|---|---|
| Total assets | $797.9 million | $633.3 million at December 31, 2013 |
| Loans, gross | $443.9 million | $333.7 million at March 31, 2013; $347.6 million at December 31, 2013 |
| Deposits | $654.4 million | $497.1 million at December 31, 2013 |
| Net interest income | $5.496 million | $4.279 million in Q1 2013 |
| Non-interest income | $1.875 million | $2.083 million in Q1 2013 |
| Net income available to common shareholders | $862 thousand | $1.038 million in Q1 2013 |
| Diluted earnings per share | $0.14 | $0.20 in Q1 2013 |
| Tax-equivalent net interest margin | 3.40% | 3.13% in Q1 2013 |
| Net cash provided by operating activities | $2.085 million | $7.408 million in Q1 2013 |
| Cash and cash equivalents at period end | $37.128 million | $31.839 million at March 31, 2013 |
Interest income was $6.403 million and interest expense was $907 thousand. Total non-interest expense was $6.026 million, including $420 thousand of merger expenses. Net income before tax was $1.195 million, and income tax expense was $333 thousand. Comprehensive income was $2.552 million, including $1.690 million of unrealized after-tax gains on available-for-sale securities.
The allowance for loan losses was $4.161 million, or 0.94% of gross loans, compared with 1.36% at March 31, 2013 and 1.21% at December 31, 2013. Provision expense remained $150 thousand. Net loan charge-offs were $208 thousand, or 0.05% of average loans.
Non-performing assets were $11.138 million, or 1.40% of total assets, at March 31, 2014, compared with $8.8 million and 1.39% at December 31, 2013. Nonaccrual loans were $7.865 million; loans more than 90 days past due and still accruing were $126 thousand; and other real estate owned was $3.147 million. Impaired loans increased to $8.433 million from $5.982 million at December 31, 2013.
Total borrowings included $34.321 million of Federal Home Loan Bank advances, $19.492 million of repurchase agreements, and $15.464 million of junior subordinated debt. The loan-to-deposit ratio was 68.4%. Management stated that liquidity was adequate; cash, short-term investments, and available-for-sale securities represented 34.7% of total assets. Unused commitments to extend credit totaled $66.1 million.
At March 31, 2014, the Bank's leverage, Tier 1 risk-based, and total risk-based capital ratios were 10.1%, 14.8%, and 15.6%, respectively. The corresponding company ratios were 10.7%, 15.7%, and 16.5%. Management expected both entities to remain well capitalized for at least the next 12 months.
Material changes versus the prior comparable period
- Net income declined 17% year over year, primarily because of $420 thousand of acquisition-related merger expenses and higher operating costs.
- Net interest income increased approximately 28%, supported by higher average earning assets, the Savannah River acquisition, and a lower cost of interest-bearing liabilities. The tax-equivalent net interest margin increased 27 basis points.
- Non-interest income decreased approximately 10%, principally because mortgage banking income fell by $396 thousand as refinancing activity slowed.
- Non-interest expense increased approximately 25% to $6.026 million. Salaries and benefits increased to $3.424 million, and full-time-equivalent employees increased to 185 from 163.
- Assets increased $164.6 million from year-end 2013, with $152.2 million attributable to the Savannah River acquisition. Acquired loans totaled $106.5 million at fair value, and acquired deposits totaled approximately $114.1 million.
- Organic loans decreased approximately $10.2 million during the quarter despite $16.8 million of organic loan production; total reported loan growth was therefore primarily acquisition-related.
- Deposits increased $157.4 million from year-end, including $43.2 million of organic growth. Available-for-sale securities increased to $253.2 million from $224.4 million.
- Shareholders' equity increased to $68.8 million from $52.7 million, reflecting the issuance of 1.274 million shares in the Savannah River transaction, retained earnings, and gains in accumulated other comprehensive income.
Acquisition, outlook, and risks
The Savannah River transaction had an approximate purchase price of $33.5 million, consisting of $19.8 million in cash and 1.274 million First Community shares valued at $13.7 million. The company recorded $4.5 million of goodwill and $1.2 million of core deposit intangibles. Management stated that merger expenses were not expected to affect future quarters. Pro forma revenue was $7.890 million and pro forma net income was $1.311 million for Q1 2014, versus pro forma net income of $1.287 million for Q1 2013; management cautioned that these figures are not necessarily indicative of future results.
No specific earnings or revenue guidance was provided. Management expected an effective tax rate of approximately 26.5% to 28.0% for the remainder of 2014 and stated that liquidity and capital were sufficient to fund operations for at least the next 12 months.
- Credit risk remains significant because a large portion of the loan portfolio is secured by real estate. Declining collateral values, higher unemployment, deteriorating payment performance, and additional loan growth could increase credit losses and provision expense.
- Non-performing assets increased during the quarter, primarily because a $2.3 million loan secured by a residential subdivision and commercial real estate was placed on nonaccrual status.
- The allowance for loan losses may be insufficient if economic or real estate conditions deteriorate. The company identified $1.7 million of current loans as potential problem relationships.
- The company is liability-sensitive within one year. Management estimated that a 200-basis-point decline in short-term rates would reduce next-12-month net interest income by 11.32%, while a 200-basis-point increase would increase it by 2.78%.
- Mortgage banking income may remain under pressure if refinancing activity stays weak. Acquisition synergies and cost savings may not be fully realized.
- Other risks include securities impairment, changes in funding access and deposit flows, regulatory or capital requirements, competition, cybersecurity, technology, and general economic conditions.
Important facts for investors to verify
- Whether the Savannah River acquisition produces the expected revenue synergies, cost savings, loan growth, and deposit retention after merger expenses cease.
- Trends in nonaccrual loans, impaired loans, classified assets, other real estate owned, charge-offs, and the adequacy of the allowance for loan losses.
- Whether reported loan growth is sustained organically rather than being primarily acquisition-driven.
- The durability of the 3.40% tax-equivalent net interest margin amid interest-rate and deposit-mix changes.
- Mortgage banking volumes and the effect of reduced refinancing activity on non-interest income.
- Capital ratios and the impact of Basel III implementation beginning in 2015, including the effect of goodwill and other intangibles.
- The fair value and unrealized loss exposure of the $253.2 million available-for-sale securities portfolio, particularly mortgage-backed and state and local government securities.