First Community Corporation 2011 Form 10-K Summary
Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company headquartered in Lexington, South Carolina. Through First Community Bank, N.A., it operates 11 full-service offices serving small and medium-sized businesses, professionals and individuals in the Midlands region, principally Lexington, Richland, Kershaw and Newberry Counties. The company also provides mortgage, investment advisory, brokerage and insurance-related services. The filing covers the fiscal year ended December 31, 2011, with comparative information for 2010 and 2009. The Palmetto South Mortgage assets were acquired effective July 31, 2011.
Key Financial Metrics
| Metric | 2011 | 2010 | Change or comment |
|---|---|---|---|
| Total assets | $593.9 million | $599.0 million | Down $5.1 million |
| Loans, excluding loans held for sale | $324.3 million | $330.0 million | Down $5.7 million |
| Deposits | $464.6 million | $455.3 million | Up $9.2 million |
| Net interest income | $18.3 million | $18.1 million | Up $0.2 million |
| Net interest margin | 3.33% | 3.28% | Improved 5 basis points on a tax-equivalent basis |
| Provision for loan losses | $1.4 million | $1.9 million | Down $0.5 million |
| Non-interest income | $6.3 million | $3.8 million | Increased primarily from mortgage and advisory fees |
| Non-interest expense | $18.4 million | $17.7 million | Increased $0.7 million |
| Net income | $3.3 million | $1.9 million | Improved $1.5 million |
| Net income available to common shareholders | $2.7 million | $1.2 million | Improved $1.5 million |
| Diluted earnings per common share | $0.81 | $0.36 | Improved from 2010 |
| Return on average assets | 0.44% | 0.20% | Improved |
| Return on average common equity | 7.98% | 3.73% | Improved |
| Efficiency ratio | 75.55% | 73.07% | Higher ratio indicates reduced operating efficiency |
Cash flow from operating activities was $10.3 million, compared with $9.7 million in 2010. Investing activities used $7.4 million, principally reflecting net investment-security purchases and loan funding, while financing activities used $12.9 million, largely because of FHLB advance repayments and dividends. Cash and cash equivalents declined to $16.5 million from $26.5 million.
At year-end, shareholders’ equity was $47.9 million, compared with $41.8 million in 2010. The allowance for loan losses was $4.7 million, or 1.45% of loans, versus $4.9 million, or 1.49%, in 2010. Net charge-offs were $1.6 million, or 0.50% of average loans. Non-performing assets were $12.8 million, or 2.16% of total assets, compared with $13.2 million, or 2.20%, in 2010.
Debt and funding at December 31, 2011 included $43.9 million of FHLB advances, $13.6 million of repurchase agreements, $17.9 million of junior subordinated debt and a new $2.5 million subordinated note issued in December 2011. The company had $20.0 million of unused short-term credit lines. Management stated that liquidity was adequate for operating and loan-funding needs and that the company expected to remain well capitalized for at least the next 12 months.
Material Changes Versus Prior Comparable Period
- Net income increased 79%, supported by higher non-interest income, lower loan-loss provision and a modestly higher net interest margin.
- Mortgage origination fees increased to $2.0 million from $1.0 million, including approximately $880,000 of fees from the Palmetto South division during the third and fourth quarters.
- Investment advisory fees and non-deposit commissions increased to $767,000 from $501,000.
- Interest expense declined to $7.2 million from $9.4 million as time deposits and borrowings declined and lower-cost transaction and savings deposits increased.
- Loans declined despite approximately $46.5 million of new loan production, reflecting scheduled paydowns and transfers to other real estate owned. Commercial mortgage loans increased slightly, while residential mortgage loans declined.
- Deposits increased $9.2 million, with core deposits increasing to approximately $370.1 million. The company reported no brokered deposits at year-end.
- FHLB advances declined to $43.9 million from $68.1 million after repayments and prepayments, including a $4.0 million prepayment in the fourth quarter.
- Other-than-temporary impairment charges recognized in earnings declined to $297,000 from $1.6 million. The company sold securities that reduced below-investment-grade securities to $13.6 million from $39.0 million.
- Accumulated other comprehensive income improved from a $2.2 million deficit to $1.3 million of income, primarily because of improved available-for-sale securities valuations.
- The company issued $2.5 million of 8.75% subordinated notes due in 2019 and warrants for 107,500 common shares.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected the 2012 effective tax rate to be approximately 32% to 34%.
- Management expected the company and bank to remain well capitalized and to exceed the OCC’s heightened individual capital requirements for at least the next 12 months.
- Loan growth remained constrained by weak demand and the slow economic recovery, although quality loan growth remained a strategic focus.
- The bank remains subject to a 2010 Formal Agreement with the OCC related primarily to downgraded non-agency mortgage-backed securities. Management believed the bank was in compliance, but the OCC retained authority to determine compliance and impose further actions.
- The company remains subject to a 2011 Federal Reserve memorandum of understanding. Prior Federal Reserve approval is required for certain new directors or senior executives, additional debt, and stock purchases or redemptions. Bank dividends to the holding company also require OCC approval under the Formal Agreement and applicable capital restrictions.
- The company held $16.5 million of amortized-cost private-label mortgage-backed securities with a fair value of $14.7 million; 12 securities totaling $13.6 million of carrying value were below investment grade. Further deterioration in mortgage performance could produce additional impairment charges.
- Credit risk is concentrated in commercial real estate and other real-estate-secured lending. Approximately 70.7% of total loans were commercial real estate loans, and approximately 92.0% of loans had real estate as a primary or secondary component of collateral.
- Non-accrual loans were $5.4 million, impaired loans were approximately $9.4 million, and accruing troubled debt restructurings were $3.9 million at year-end. Five restructured loans totaling $715,000 subsequently defaulted during 2011.
- The company participated in the Treasury’s Capital Purchase Program. Its $11.35 million Series T preferred stock carried a 5% dividend rate through the first five years and increases to 9% after February 15, 2014 if not redeemed. The preferred stock reduces earnings available to common shareholders and ranks senior to common stock.
- The company’s interest-rate swap had a $10.0 million notional amount and a negative fair value of $602,000 at year-end. Management’s sensitivity analysis estimated that a 200-basis-point decline in short-term rates would reduce projected 12-month net interest income by 12.91%.
- Palmetto South included contingent consideration of up to $1.2 million over three years, with approximately $600,000 recognized as a contingent liability based on management’s estimate.
- Management reported no material pending legal proceedings and no subsequent events requiring accrual or disclosure. Internal control over financial reporting and disclosure controls were assessed as effective; the independent auditor did not provide an internal-control attestation because the company qualified for the applicable smaller-reporting-company exemption.
Most Important Facts for Investors to Verify
- Confirm the current status and terms of the OCC Formal Agreement and Federal Reserve 2011 MOU, including any restrictions on dividends, debt, capital actions or executive appointments.
- Review the current performance, ratings, fair values and impairment assumptions for the private-label mortgage-backed securities portfolio.
- Assess commercial real estate concentration, collateral values, non-accrual loans, troubled debt restructurings and the adequacy of the $4.7 million allowance for loan losses.
- Verify whether the company redeemed or continues to carry the $11.35 million Series T preferred stock and whether the 9% dividend step-up remains relevant.
- Evaluate the sustainability of 2011’s higher non-interest income, particularly mortgage origination and investment advisory fees, versus recurring banking revenue.
- Monitor cash balances, deposit trends, FHLB borrowing, subordinated debt and the company’s ability to fund operations without unrestricted dividends from the bank.
- Reconcile the filing’s reported per-share results with the audited financial statements; the audited statements report 2010 diluted earnings per common share of $0.36.