Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company for First Community Bank, serving small and mid-sized businesses, professionals and individuals primarily in the Midlands of South Carolina. The Form 10-K covers the fiscal year ended December 31, 2013; fourth-quarter 2013 net income was $850 thousand, or $0.16 diluted earnings per share.
The company completed its acquisition of Savannah River Financial Corporation on February 1, 2014. The transaction added branches in Aiken, South Carolina and Augusta, Georgia and was not included in 2013 operating results.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total assets | $633.3 million | $602.9 million | +$30.4 million |
| Loans, excluding loans held for sale | $347.6 million | $332.1 million | +4.7% |
| Total deposits | $497.1 million | $475.0 million | +4.7% |
| Net interest income | $18.0 million | $17.6 million | +$475 thousand |
| Net income | $4.1 million | $4.0 million | +4.3% |
| Net income available to common shareholders | $4.1 million | $3.3 million | +25.7% |
| Diluted EPS | $0.78 | $0.79 | Down $0.01 |
| Return on average assets | 0.66% | 0.55% | Up 11 basis points |
| Return on average common equity | 7.68% | 7.40% | Up 28 basis points |
Net interest margin on a tax-equivalent basis was 3.18%, compared with 3.22% in 2012. The efficiency ratio increased to 76.69% from 74.89%. Non-interest income was $8.2 million, compared with $8.0 million, while non-interest expense rose to $20.4 million from $19.4 million.
Cash provided by operating activities was $16.3 million, compared with $6.0 million in 2012. Investing activities used $51.4 million, primarily reflecting purchases of available-for-sale securities and loan growth. Financing activities provided $30.6 million. Cash and cash equivalents declined to $14.2 million at year-end from $18.7 million.
Liquidity, Debt and Capital
- Core deposits, excluding time deposits of $100,000 or more, increased to $432.7 million from $400.8 million.
- Average loans-to-deposits declined to 69.17% from 70.33%; year-end loans, including loans held for sale, were approximately 70.7% of deposits.
- Federal Home Loan Bank advances totaled $43.3 million, up from $36.3 million, and securities sold under repurchase agreements totaled $18.6 million.
- Junior subordinated debt was $15.5 million, consisting principally of trust preferred securities with a September 2034 maturity and distributions based on three-month LIBOR plus 257 basis points.
- Management stated that liquidity was adequate for operating and loan-funding requirements and that the Bank maintained unused short-term lines of credit totaling $20.0 million, plus access to Federal Reserve and FHLB funding.
- The Bank was deemed well capitalized. At December 31, 2013, the Bank reported Tier 1 risk-based capital of 16.84%, total risk-based capital of 17.93% and Tier 1 leverage of 10.30%.
Material Changes Versus the Prior Comparable Period
- Loan growth continued despite a slow economic environment; average loans increased to $344.1 million from $331.6 million, and funded loan production increased to approximately $59.7 million from $49.7 million.
- Funding mix improved as transaction, money market and savings deposits increased 16.3% in aggregate, while time deposits declined. The lower-cost funding mix reduced interest expense to $3.7 million from $5.4 million.
- Interest income declined to $21.8 million from $23.0 million as asset yields fell, but the reduction in funding costs more than offset the decline and increased net interest income.
- Mortgage banking income declined to $3.8 million from $4.2 million as rising mortgage rates reduced refinancing activity. Investment advisory fees and non-deposit commissions increased to $972 thousand from $651 thousand.
- Provision for loan losses increased modestly to $528 thousand from $496 thousand. Net charge-offs increased to $930 thousand from $574 thousand, and the allowance declined to $4.2 million, or 1.21% of loans, from $4.6 million, or 1.39%.
- Non-performing assets improved slightly to 1.39% of total assets from 1.45%, although non-accrual loans increased to $5.4 million from $4.7 million. Commercial real estate remained the principal credit exposure.
- Non-interest expense increased primarily due to higher salaries and benefits and $539 thousand of merger-related costs associated with the Savannah River acquisition.
- Accumulated other comprehensive income changed from a gain of $2.4 million to a loss of $2.5 million, principally because rising interest rates reduced the fair value of the available-for-sale securities portfolio. Total shareholders’ equity declined to $52.7 million from $54.2 million despite positive net income.
Outlook, Risks, Contingencies and Unusual Items
- Management expected a 2014 effective tax rate of approximately 30% to 32%.
- The Savannah River acquisition had an estimated purchase price of approximately $33.5 million, comprising approximately $19.8 million of cash and 1.274 million shares of company stock. The company had not completed the fair-value allocation for acquired core deposit intangibles and goodwill as of the filing.
- Management identified potential benefits from the acquisition, including revenue synergies and cost savings, but cautioned that integration costs, customer or employee attrition, execution difficulties and failure to achieve expected benefits could adversely affect results.
- Credit risk is concentrated in real estate and commercial real estate. Approximately 92% of loans had real estate as a primary or secondary collateral component, and commercial real estate and construction loans represented approximately 77.7% of the loan portfolio.
- Four current loan relationships totaling approximately $5.0 million were identified as potential problem loans. Impaired loans totaled approximately $6.0 million, and four accruing troubled debt restructurings totaled $576 thousand.
- The available-for-sale securities portfolio totaled $224.4 million and had $5.2 million of gross unrealized losses. Management concluded that the losses were not other-than-temporary and stated that it had the intent and ability to hold the securities until recovery or maturity.
- No other-than-temporary impairment charge was recorded in 2013, compared with a $200 thousand credit-component charge in 2012. The company sold its remaining below-investment-grade private-label mortgage-backed securities during 2013 and held no below-investment-grade debt securities at year-end.
- Basel III capital requirements were scheduled to begin phasing in during 2015, with higher common equity and capital conservation requirements fully phased in by 2019. The ultimate effect on earnings, capital and distributions remained uncertain.
- The company cited sensitivity to interest rates, local economic conditions, real estate values, deposit flows, regulatory requirements, cybersecurity incidents, competition, regulatory examinations and potential future loan-loss provisions.
- Commitments to extend credit, including lines of credit, totaled $45.5 million at year-end, down from $53.3 million. Management did not believe pending litigation would have a material adverse effect.
Important Facts for Investors to Verify
- Verify post-closing results, purchase accounting, goodwill and core deposit intangible valuations for the Savannah River acquisition.
- Monitor commercial real estate concentrations, potential problem loans, non-accrual loans, charge-offs and the adequacy of the $4.2 million allowance.
- Assess the effect of rising or falling interest rates on the 3.18% net interest margin, securities valuations, funding costs and mortgage banking income.
- Review the unrealized securities losses recorded in accumulated other comprehensive income and whether management retains the ability and intent to hold affected securities.
- Evaluate the impact of Basel III implementation on capital ratios, dividend capacity, asset risk weights and potential capital needs.
- Confirm liquidity after the acquisition, including deposit retention, FHLB advances, short-term borrowings and available credit lines.
- Consider that the filing’s 2013 annual results exclude the operating contribution and integration effects of the February 2014 acquisition.