First Community Corporation — 2014 Q3 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company operating through First Community Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014, compared with the corresponding 2013 periods and December 31, 2013 balance-sheet amounts. The company completed the Savannah River Financial Corporation acquisition on February 1, 2014 and acquired approximately $40 million of deposits and $8.7 million of loans from First South Bank on September 26, 2014.
Financial condition and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $6.1 million in 2014 vs. $4.6 million in 2013 | $17.5 million vs. $13.3 million |
| Net income | $1.6 million vs. $1.0 million | $3.6 million vs. $3.3 million |
| Diluted EPS | $0.23 vs. $0.20 | $0.55 vs. $0.62 |
| Non-interest income | $2.3 million vs. $1.9 million | $6.1 million vs. $6.3 million |
| Non-interest expense | $6.1 million vs. $5.0 million | $17.9 million vs. $14.7 million |
| Tax-equivalent net interest margin | 3.48% vs. 3.18% | 3.42% vs. 3.15% |
- Total assets were $830.9 million at September 30, 2014, up from $633.3 million at December 31, 2013.
- Gross loans were $448.6 million, compared with $347.6 million at year-end 2013; net loans were $444.4 million. Commercial mortgage loans represented 68.0% of gross loans.
- Deposits were $687.0 million, up from $497.1 million. The loan-to-deposit ratio declined to 65.8% from 70.7%.
- Cash and cash equivalents were $56.1 million at September 30, 2014, compared with $21.0 million at September 30, 2013.
- Operating cash flow for the first nine months was $9.2 million, compared with $18.1 million in 2013. Investing activities used $20.6 million, while financing activities provided $53.3 million, resulting in a $42.0 million increase in cash.
- Debt and other borrowings included $32.3 million of Federal Home Loan Bank advances, $17.7 million of repurchase borrowings and $15.5 million of junior subordinated debt.
- Shareholders’ equity was $72.6 million, or 8.7% of assets, compared with $52.7 million, or 8.3%, at December 31, 2013. The increase included 1.274 million shares issued for the Savannah River acquisition.
- The allowance for loan losses was $4.2 million, or approximately 0.92% of gross loans. Provision expense was $702 thousand for the first nine months, compared with $379 thousand in 2013.
- Non-performing assets were $9.9 million, or 1.19% of total assets, including $6.8 million of nonaccrual loans and $3.0 million of foreclosed real estate. Impaired loans totaled approximately $7.4 million.
- The company reported bank and holding-company total capital ratios of 15.9% and 16.6%, respectively, and stated that both were expected to remain well capitalized for at least the next 12 months.
Material changes versus comparable periods
- Nine-month net income increased 10.0% to $3.6 million, but diluted EPS declined because of the substantially higher share count from the Savannah River transaction.
- Third-quarter net income increased approximately 48% to $1.6 million, supported by higher earning assets, improved funding costs and stronger mortgage banking activity.
- Nine-month net interest income increased approximately $4.3 million. Average earning assets increased to $701.7 million from $576.9 million, while the tax-equivalent margin improved by 27 basis points.
- Nine-month non-interest income declined modestly because mortgage banking income fell $631 thousand, partially offset by higher other fee income.
- Nine-month non-interest expense increased $3.2 million, primarily from the Savannah River acquisition, added employees and branches, marketing, and $474 thousand of merger and acquisition costs.
- Organic loans declined approximately $14.2 million during the first nine months despite $49.2 million of organic production; reported loan growth was primarily acquisition-related.
- Nonaccrual loans increased from $5.4 million at year-end 2013 to $6.8 million, and non-performing assets increased from $8.8 million to $9.9 million. Management attributed much of the increase to one $1.7 million credit.
- Accumulated other comprehensive income improved to a $609 thousand gain from a $2.5 million loss, primarily due to unrealized gains on available-for-sale securities.
Outlook, risks, contingencies and unusual items
- Management stated that liquidity was adequate and expected existing core deposits, available-for-sale securities, borrowing capacity and other funding sources to meet needs for at least the next 12 months.
- The company had $52.5 million of commitments to extend credit, including $29.6 million of unused home-equity lines.
- Interest-rate sensitivity modeling estimated that a parallel 100-basis-point increase could increase projected net interest income by 2.43%, while a 100-basis-point decline could reduce it by 5.9%.
- Management expected the effective tax rate to remain approximately 27.5% to 30.0% through the remainder of 2014.
- Mortgage banking activity improved in the third quarter, but management anticipated some slowdown in the fourth quarter.
- Key risks include commercial and residential real-estate concentration, declining collateral values, additional credit losses, adequacy of the allowance, regulatory examinations, funding and deposit-flow changes, competition, interest-rate movements, cybersecurity, and integration of acquisitions.
- The Savannah River acquisition generated approximately $33.5 million of consideration, including $19.8 million in cash and $13.7 million in company shares, and added goodwill and core-deposit intangibles. The First South transaction added approximately $40 million of deposits and $8.7 million of loans and generated identifiable intangibles.
- No material pending legal proceedings were reported. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether acquisition-related loan growth and deposits translate into sustainable organic loan growth and earnings after integration costs subside.
- The trend in commercial real-estate concentrations, nonaccrual loans, impaired loans, charge-offs and the adequacy of the $4.2 million allowance.
- Whether net interest margin remains elevated as interest rates and deposit pricing change.
- The effect of the Savannah River and First South transactions on future expenses, goodwill, core-deposit intangible amortization and capital ratios.
- Whether liquidity, borrowing capacity and capital remain sufficient under adverse deposit, credit and interest-rate scenarios.
- The impact of Basel III capital requirements beginning in January 2015; the filing states that the ultimate effect was still under review.