Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company operating through First Community Bank, serving small and midsize businesses, professionals and individuals in the Midlands region of South Carolina through 11 full-service offices and related mortgage, investment advisory and insurance services. This Form 10-K covers the fiscal year ended December 31, 2012; fourth-quarter data is included where disclosed.
- The Bank converted from a national charter to a South Carolina state nonmember charter on October 1, 2012.
- The OCC Formal Agreement and heightened individual capital requirements were terminated effective June 28, 2012, and the Federal Reserve MOU was terminated effective July 10, 2012.
- The Company had 158 full-time employees and approximately 5.29 million common shares outstanding as of March 2013.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total assets | $602.9 million | $593.9 million | Up $9.0 million |
| Loans, excluding loans held for sale | $332.1 million | $324.3 million | Up $7.8 million |
| Deposits | $475.0 million | $464.6 million | Up $10.4 million |
| Net interest income | $17.6 million | $18.3 million | Down $0.7 million |
| Net interest margin, tax equivalent | 3.22% | 3.33% | Down 11 basis points |
| Provision for loan losses | $0.5 million | $1.4 million | Down $0.9 million |
| Non-interest income | $8.0 million | $6.3 million | Up $1.7 million |
| Non-interest expense | $19.4 million | $18.4 million | Up $1.0 million |
| Net income | $4.0 million | $3.3 million | Up $0.6 million |
| Net income available to common shareholders | $3.3 million | $2.7 million | Up $0.6 million |
| Diluted EPS | $0.79 | $0.81 | Down $0.02 |
| Return on average assets | 0.55% | 0.44% | Up 11 basis points |
| Return on average common equity | 7.40% | 7.98% | Down 58 basis points |
| Operating efficiency ratio | 74.82% | 75.55% | Improved 73 basis points |
Cash flow from operating activities was $6.0 million, compared with $6.5 million in 2011. Investing activities used $7.5 million, primarily reflecting net loan growth and securities purchases, while financing activities provided $3.7 million. Cash and cash equivalents increased to $18.7 million from $16.5 million.
- Shareholders’ equity increased to $54.2 million from $47.9 million; equity to assets rose to 8.99% from 8.06%.
- The allowance for loan losses was $4.6 million, or 1.39% of loans, compared with $4.7 million, or 1.45%, in 2011. Net charge-offs declined to $0.6 million from $1.6 million.
- Non-performing assets declined to $8.8 million, or 1.45% of assets, from $12.8 million, or 2.16%. Nonaccrual loans declined to $4.7 million from $5.4 million.
- Commercial real estate remained a significant concentration: approximately $237.0 million, or 71.3% of total loans, was secured by commercial real estate at year-end.
- Regulatory capital remained strong. The Bank’s Tier 1 risk-based, total risk-based and leverage ratios were 16.87%, 18.12% and 10.34%, respectively, at December 31, 2012, exceeding well-capitalized thresholds.
- Year-end debt included $36.3 million of FHLB advances, $15.9 million of repurchase agreements and $15.5 million of junior subordinated debt. The $2.5 million subordinated notes issued in 2011 were redeemed in November 2012.
Material Changes Versus Prior Comparable Period
- Net income increased, primarily because lower loan-loss provisions and higher mortgage origination income more than offset lower net interest income and higher operating expenses.
- Mortgage origination fees increased to $4.2 million from $2.0 million, supported by the full-year contribution of the Palmetto South mortgage business acquired in 2011.
- Net interest income declined because historically low interest rates reduced earning-asset yields faster than funding costs. The yield on earning assets declined to 4.15% from 4.64%.
- Funding composition improved: lower-cost transaction, money-market and savings deposits increased by approximately $35.4 million, while time deposits declined by approximately $25.0 million.
- Asset quality improved, including lower non-performing assets, impaired loans and charge-offs, although commercial real estate and local economic conditions remain important exposures.
- The Company completed a $15.0 million common-stock offering, receiving approximately $13.8 million after expenses. Proceeds supported redemption of all Series T preferred stock, repurchase of the TARP warrant and repayment of the subordinated notes.
- The Company fully exited the TARP Capital Purchase Program in 2012. Preferred stock was redeemed, and the Treasury warrant was repurchased for $297,500.
- Investment securities available for sale were $203.4 million at year-end. Credit-component other-than-temporary impairment was $200,000, compared with $297,000 in 2011; four below-investment-grade private-label mortgage securities remained with carrying value of approximately $1.6 million.
Guidance, Outlook, Risks and Unusual Items
- Management described quality loan growth as a strategic focus for 2013 and thereafter and stated that core deposits and existing liquidity should meet short- and long-term funding needs.
- Management expected an effective tax rate of approximately 28% to 31% for 2013. No broader earnings or revenue guidance was provided.
- Management stated that the Bank was expected to remain well capitalized and that liquidity was adequate for operations and loan funding for at least the following 12 months.
- Interest-rate risk is material. Modeling indicated that a 200-basis-point rate increase could increase projected next-12-month net interest income by 6.52%, while a 200-basis-point decline could reduce it by 13.58%, subject to management’s assumptions.
- Key credit risks include the concentration of loans in commercial real estate, real-estate collateral values, small and midsize business borrowers, potential increases in delinquencies and the adequacy of the allowance for loan losses.
- Investment-portfolio risks include additional impairment charges on private-label mortgage-backed securities and losses if securities with unrealized losses must be sold before recovery.
- Other risks include competition for deposits and loans, changing banking regulations and capital requirements, deposit flows, FDIC premiums, cybersecurity incidents, reliance on key personnel and potential restrictions on dividends.
- The Company had $53.3 million of commitments to extend credit at December 31, 2012. These commitments may not be fully drawn.
- A $10.0 million interest-rate swap, with a negative fair value of $338,000, expires October 8, 2013.
- Management reported no material pending or threatened litigation and no subsequent events requiring disclosure through the financial-statement issuance date.
Investor Verification Points
- Verify the sustainability of mortgage origination fees and whether lower interest rates continue to pressure net interest margin.
- Review commercial real estate concentrations, classified loans, troubled debt restructurings, nonaccrual loans and potential problem loans.
- Assess whether the $4.6 million allowance for loan losses remains adequate under adverse local real-estate and economic conditions.
- Examine the remaining private-label mortgage-backed securities, valuation assumptions and potential future OTTI charges.
- Confirm liquidity sources, FHLB borrowing capacity, deposit maturity concentrations and the approximately $109.2 million of certificates of deposit maturing in 2013.
- Evaluate the effect of the common-stock offering and TARP exit on per-share economics, capital ratios and future dividends.
- Review the impact of final Basel III and other regulatory changes on required capital, liquidity, operating costs and growth.