FIRST COMMUNITY CORP quarterly report, Q3 FY2018

First Community Corporation — Form 10-Q Summary

Business context and reporting period

First Community Corporation is a South Carolina bank holding company whose principal subsidiary provides commercial and retail banking, mortgage banking, investment advisory, and non-deposit services. This Form 10-Q covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The financial statements are unaudited.

Results for 2018 include the operations of Cornerstone Bancorp and Cornerstone National Bank, acquired on October 20, 2017, for approximately $27.1 million in cash and stock.

Financial performance and position

Metric	Three months ended Sept. 30	Nine months ended Sept. 30
Net interest income	$8.9 million, versus $7.2 million	$26.4 million, versus $21.3 million
Non-interest income	$2.8 million, versus $2.4 million	$8.4 million, versus $7.0 million
Total revenue¹	$11.7 million, versus $9.6 million	$34.7 million, versus $28.4 million
Net income	$2.8 million, versus $1.9 million	$8.5 million, versus $5.3 million
Diluted EPS	$0.37, versus $0.28	$1.11, versus $0.78
Net interest margin	3.55%, versus 3.42%	3.61%, versus 3.41%
Effective tax rate	Not separately highlighted	18.9%, versus 24.5%

¹Total revenue is presented as net interest income plus non-interest income, consistent with management’s segment discussion.

Total assets were $1.091 billion at September 30, 2018, up from $1.051 billion at December 31, 2017.
Gross loans increased to $696.5 million from $646.8 million; net loans were $690.3 million. Commercial mortgage loans represented 71.6% of gross loans.
Deposits increased to $921.7 million from $888.3 million. The loan-to-deposit ratio rose to 76.2% from 73.4%.
Investment securities declined to approximately $267.8 million from $281.8 million, including held-to-maturity and available-for-sale securities.
Cash and cash equivalents were $36.9 million at September 30, 2018, compared with $30.6 million at December 31, 2017.
Operating cash flow was $12.5 million for the first nine months, compared with $13.2 million in the prior-year period. Investing activities used $41.5 million, principally reflecting loan growth and securities purchases; financing activities provided $35.4 million.
The allowance for loan losses was $6.2 million, or 0.89% of gross loans, compared with $5.8 million, or 0.90%, at year-end 2017. The nine-month provision was $252 thousand, versus $360 thousand.
Non-performing assets were $4.9 million, or 0.45% of total assets, compared with $5.3 million, or 0.51%, at December 31, 2017. Nonaccrual loans were $2.9 million.
Shareholders’ equity was $108.2 million, or 9.9% of assets, compared with $105.7 million, or 10.1%, at year-end 2017. The company paid $2.3 million in common dividends during the first nine months.
The Bank reported a 9.8% leverage ratio, 13.3% Tier 1 risk-based capital ratio, and 14.1% total risk-based capital ratio at September 30, 2018. Management stated that the Bank and Company were well capitalized.

Material changes versus the prior comparable periods

Nine-month net income increased approximately 61% and third-quarter net income increased approximately 50%, benefiting from the Cornerstone acquisition, loan growth, higher yields, and a lower tax rate.
Average earning assets increased by $139.3 million for the nine-month period and $154.6 million for the third quarter. Loans represented 69.4% of average earning assets for the first nine months and 70.1% in the third quarter.
Net interest margin improved as loan yields increased and the earning-asset mix shifted toward loans. However, the cost of interest-bearing liabilities increased to 0.52% from 0.44% for the nine months and to 0.61% from 0.44% for the third quarter.
Non-interest income increased primarily from the Cornerstone acquisition, higher mortgage banking income, increased investment advisory fees, deposit fees, debit-card activity, and bank-owned life insurance income.
Non-interest expense increased to $24.0 million from $21.0 million for the nine months and to $8.1 million from $6.9 million for the quarter. Higher salaries, employee additions, data-processing costs, occupancy, and intangible amortization were partly offset by the absence of 2017 merger expenses.
The effective tax rate benefited from the federal corporate tax rate reduction to 21% and the purchase of a South Carolina Rehabilitation Tax Credit. Management expected an effective tax rate of approximately 20.0% to 20.5% for the remainder of 2018.
Accumulated other comprehensive loss increased to $4.6 million from $444 thousand, principally because of unrealized losses on available-for-sale securities as interest rates increased.

Guidance, outlook, risks, contingencies, and unusual items

The filing provides no formal earnings or revenue guidance. Management stated that existing liquidity and retained earnings should be sufficient to fund operations for at least the next 12 months.
Management intends to continue pursuing quality loan growth, core-deposit growth, mortgage banking, and investment advisory activities. It also noted that competitive deposit pricing may increase funding costs as interest rates rise.
Liquidity sources include core deposits, maturing loans and investments, repurchase agreements, federal funds lines totaling $20.0 million, and an FHLB credit line of up to 25% of Bank assets. Unused commitments to extend credit totaled $131.9 million, including $37.5 million of unused home-equity lines.
Approximately 91.3% of the loan portfolio was collateralized by real estate. Management identified real-estate values, economic conditions, loan growth, credit quality, allowance adequacy, regulatory examinations, interest rates, deposit flows, funding access, cybersecurity, and merger integration as key risks.
The company is asset-sensitive within one year. Its modeled 12-month net interest income sensitivity at September 30, 2018 was negative 2.49% for a 200-basis-point rate increase and negative 4.99% for a 200-basis-point decrease.
Available-for-sale securities had $6.3 million of unrealized losses at September 30, 2018. Management did not consider the securities portfolio to be other-than-temporarily impaired.
The company had no material pending legal proceedings, no disclosed subsequent events requiring accrual or disclosure, and no material changes in internal control over financial reporting.
The company is evaluating the future credit-loss standard, which was scheduled to become effective for reporting periods beginning after December 15, 2019. The filing does not provide a quantified implementation impact.

Most important facts for investors to verify

Whether loan growth, particularly commercial real estate growth, remains consistent with underwriting standards and whether credit deterioration increases as the portfolio seasons.
Whether the $6.2 million allowance remains adequate relative to non-performing loans, real-estate collateral values, charge-offs, and regulatory review.
Whether rising deposit costs compress net interest margin despite continued loan growth and higher asset yields.
Whether the Cornerstone acquisition delivers expected revenue, cost, deposit, and customer-retention benefits without additional integration costs.
Whether unrealized securities losses, interest-rate changes, or deposit pricing pressure materially affect capital, liquidity, or earnings.
The company’s future adoption impact from the current expected credit-loss standard and any resulting changes to allowance requirements.