First Community Corporation — 2012 Q1 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company operating First Community Bank, N.A. The company provides commercial, consumer, mortgage, investment, insurance and online banking services through its South Carolina market network. The filing covers the three months ended March 31, 2012, with balance-sheet comparisons to December 31, 2011 and operating comparisons to the three months ended March 31, 2011. The financial statements are unaudited.
Financial performance and key metrics
| Metric | Q1 2012 | Comparable period or date |
|---|---|---|
| Total assets | $601.5 million | $593.9 million at Dec. 31, 2011 |
| Total loans | $331.1 million | $324.3 million at Dec. 31, 2011; $334.2 million at Mar. 31, 2011 |
| Total deposits | $476.9 million | $464.6 million at Dec. 31, 2011 |
| Net interest income | $4.5 million | $4.5 million in Q1 2011 |
| Tax-equivalent net interest margin | 3.36% | 3.30% in Q1 2011 |
| Provision for loan losses | $230 thousand | $360 thousand in Q1 2011 |
| Non-interest income | $1.5 million | $1.4 million in Q1 2011 |
| Non-interest expense | $4.6 million | $4.7 million in Q1 2011 |
| Net income | $799 thousand | $570 thousand in Q1 2011 |
| Net income available to common shareholders | $630 thousand | $403 thousand in Q1 2011 |
| Diluted earnings per share | $0.19 | $0.12 in Q1 2011 |
| Comprehensive income | $1.7 million | $969 thousand in Q1 2011 |
Interest income declined to $6.0 million from $6.4 million, but interest expense fell more sharply to $1.5 million from $2.0 million. The yield on earning assets declined to 4.48% from 4.77%, while the cost of interest-bearing liabilities declined to 1.36% from 1.70%. The effective tax rate was 29.3%, compared with 28.5% in Q1 2011; management expected a 29.0%–32.0% rate for the remainder of 2012.
Non-performing assets were $10.8 million, or 1.79% of total assets, at March 31, 2012, compared with $12.8 million, or 2.15%, at December 31, 2011. Nonaccrual loans were $5.4 million, and there were no loans more than 90 days past due and still accruing. The allowance for loan losses was $4.7 million, or 1.43% of total loans, compared with 1.45% at year-end 2011. Net charge-offs were $184 thousand, or 0.06% of average loans.
Cash provided by operating activities was $1.6 million. Investing activities used $651 thousand, while financing activities provided $6.7 million, primarily reflecting a $12.3 million increase in deposits partially offset by $5.1 million of net FHLB advance repayments. Cash and cash equivalents increased by $7.7 million during the quarter to $24.2 million.
Debt at March 31, 2012 included $38.9 million of FHLB advances, $17.9 million of junior subordinated debt and $13.5 million of repurchase obligations. The loan-to-deposit ratio was 69.4%. Interest-bearing bank balances, federal funds sold and available-for-sale securities represented 35.2% of total assets. Management stated that liquidity was adequate and identified unused federal funds lines totaling $20.0 million, a $10.0 million repo line and an FHLB borrowing facility of up to 25% of bank assets.
Material changes versus prior periods
- Net income increased 40.2% and diluted EPS increased to $0.19 from $0.12, primarily due to lower loan-loss provision and lower non-interest expense.
- Net interest income was broadly stable despite a $4.9 million decline in average earning assets; the tax-equivalent net interest margin improved by six basis points.
- Mortgage origination fees increased by $532 thousand, partly reflecting the July 2011 acquisition of Palmetto South Mortgage and continued low interest rates.
- Non-interest expense declined 2.4%, despite a $245 thousand increase in salaries and benefits. FDIC assessments, other real estate expense and intangible amortization declined.
- Loans increased $6.8 million from year-end, supported by more than $15.4 million of new loan production, while deposits increased $12.3 million.
- Other real estate owned declined to $5.4 million from $7.4 million at year-end, contributing to the reduction in non-performing assets.
- The company recognized $200 thousand of credit-related other-than-temporary impairment on two private-label mortgage-backed securities, compared with $4 thousand in Q1 2011.
- The company repaid a $4.0 million FHLB advance before maturity and recorded a $121 thousand loss on early extinguishment of debt.
- Subsequent to March 31 through May 1, 2012, the company sold six additional non-investment-grade private-label mortgage-backed securities with book value of approximately $9.8 million. The approximately $1.9 million loss was offset by approximately $1.9 million of gains on agency mortgage-backed and municipal securities.
Guidance, outlook, risks and contingencies
Management did not provide earnings or revenue guidance. It described quality loan growth as a strategic focus and expected the bank and company to remain well capitalized for at least the next 12 months. Management also stated that liquidity should be sufficient to fund operations for at least the next 12 months.
The Bank remains subject to a Formal Agreement with the OCC related primarily to downgraded non-agency mortgage-backed securities and to heightened individual capital requirements. The company also remains subject to a 2011 Federal Reserve memorandum of understanding requiring prior approval for certain actions, including incurring or guaranteeing debt and purchasing or redeeming shares. Management stated that it believed the company was in compliance, but failure to comply could lead to additional regulatory requirements or enforcement actions.
The principal risks are the heavy concentration of loans secured by real estate, declining collateral values, higher delinquencies or charge-offs, additional impairment of private-label mortgage-backed securities, interest-rate and funding-cost changes, regulatory restrictions, deposit outflows and the adequacy of the allowance for loan losses. The company was liability-sensitive within one year; modeled net interest income would decline 6.50% under an immediate 100-basis-point decrease in rates and 11.20% under a 200-basis-point decrease. The filing states that no material subsequent events requiring accrual or disclosure occurred, apart from the separately disclosed post-quarter-end securities transactions.
Most important facts for an investor to verify
- Reconcile the bank’s reported total risk-based capital ratio: one section reports 16.38% at March 31, 2012, while the MD&A reports 16.78%.
- Assess the remaining private-label mortgage-backed securities exposure, impairment assumptions and the effect of the post-quarter-end sales.
- Monitor real-estate concentration, $10.8 million of non-performing assets, $5.4 million of nonaccrual loans and $16.8 million of substandard loans.
- Review compliance status and continuing restrictions under the OCC Formal Agreement and Federal Reserve 2011 MOU, including limitations on debt and dividends.
- Evaluate whether the lower loan-loss provision and higher mortgage origination fees are sustainable, given the company’s stated economic and credit risks.
- Confirm liquidity capacity, deposit stability and the company’s ability to fund loan growth while repaying or refinancing borrowings.