Business Context and Reporting Period
First Community Corporation, a South Carolina bank holding company, filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Its principal subsidiary is First Community Bank, N.A. The company is primarily funded by deposits and earns income from loans, investment securities, mortgage origination, and other banking services.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income | $4.45 million, versus $4.62 million | $8.96 million, versus $9.07 million |
| Net income | $928 thousand, versus $726 thousand | $1.73 million, versus $1.30 million |
| Net income available to common shareholders | $760 thousand, versus $558 thousand | $1.39 million, versus $961 thousand |
| Diluted EPS | $0.23, versus $0.17 | $0.42, versus $0.29 |
| Non-interest income | $1.86 million, versus $1.22 million | $3.32 million, versus $2.60 million |
| Non-interest expense | $4.91 million, versus $4.43 million | $9.52 million, versus $9.10 million |
| Provision for loan losses | $71 thousand, versus $390 thousand | $301 thousand, versus $750 thousand |
- Balance sheet: Assets were $598.0 million at June 30, 2012, compared with $593.9 million at December 31, 2011. Gross loans were $324.9 million, net loans were $320.2 million, and deposits were $474.0 million.
- Margins: Six-month net interest margin was 3.33% on a taxable-equivalent basis, compared with 3.34% in the prior-year period. Second-quarter margin was 3.30%, compared with 3.37%. The yield on earning assets declined, but funding costs also declined.
- Credit quality: The allowance for loan losses was $4.7 million, or 1.46% of loans. Net charge-offs were $258 thousand for the first six months, compared with $945 thousand in 2011. Non-performing assets were $9.5 million, or 1.60% of assets, versus $12.8 million, or 2.15%, at year-end 2011.
- Cash flow: Operating activities provided $5.1 million and investing activities provided $4.4 million in the first six months. Financing activities provided $2.6 million, producing a $12.1 million increase in cash and cash equivalents to $28.6 million.
- Debt: Federal Home Loan Bank advances declined to $38.5 million from $43.9 million. Junior subordinated debt was $17.9 million, and repurchase agreement borrowings were $12.8 million.
- Liquidity: Interest-bearing bank balances, federal funds sold, and available-for-sale securities represented 35.9% of assets. The loan-to-deposit ratio was 68.5%, compared with 69.8% at December 31, 2011. Unused credit commitments totaled $40.3 million.
- Capital: The Bank's June 30 regulatory leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.93%, 16.62%, and 17.88%, respectively. The company reported ratios of 9.94%, 16.64%, and 18.59%; both were considered well-capitalized.
Material Changes Versus Prior Comparable Period
- Six-month net income increased approximately 33%, primarily due to lower loan-loss provisions and higher non-interest income, partly offset by higher operating expenses and slightly lower net interest income.
- Mortgage origination fees increased to $1.6 million from $454 thousand, aided by the addition of Palmetto South Mortgage Corporation in July 2011 and continued refinancing activity.
- Non-interest expense increased 4.6%, including a $796 thousand increase in salaries and benefits associated largely with additional employees from Palmetto South.
- Deposits increased $9.4 million, while FHLB advances declined $5.4 million from year-end. The company continued shifting funding toward lower-cost transaction, money-market, and savings deposits.
- Other real estate owned declined to $4.9 million from $7.4 million. Classified and non-performing loans also moderated, although the portfolio remains heavily concentrated in commercial real estate.
- The company sold eight below-investment-grade non-agency mortgage-backed securities with approximately $11.2 million of book value. A $2.1 million sales loss was substantially offset by gains on agency mortgage-backed and municipal securities. Remaining below-investment-grade securities had a carrying value of approximately $1.7 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected an effective tax rate of approximately 29.0% to 32.0% for the remainder of 2012.
- Management stated that liquidity and capital were adequate to fund operations and anticipated remaining well-capitalized for at least the next 12 months. No formal earnings or revenue guidance was provided.
- The OCC terminated the Bank's Formal Written Agreement and individual minimum capital requirements effective June 28, 2012. The Federal Reserve terminated the company's Memorandum of Understanding effective July 10, 2012.
- On July 27, 2012, the company issued 1.875 million common shares at $8.00 per share and received approximately $13.8 million of net proceeds. Management intended to use the proceeds primarily to repurchase Series T preferred stock and potentially a U.S. Treasury warrant, subject to Treasury and regulatory approvals.
- The company recognized $200 thousand of credit-related other-than-temporary impairment on securities during the first six months. Remaining private-label mortgage-backed securities and real-estate collateral remain subject to valuation and credit-loss risk.
- Material risks include deterioration in real estate values, higher credit losses, adequacy of the allowance, additional securities impairment, interest-rate changes, funding costs, deposit outflows, regulatory actions, and the company's ability to maintain capital and grow quality loans.
- The company was liability-sensitive within one year. Its modeled 12-month net interest income sensitivity at June 30, 2012 was positive 7.88% for a 200-basis-point rate increase and negative 15.23% for a 200-basis-point decrease, subject to management assumptions.
- No material legal proceedings were reported, and management concluded that disclosure controls and procedures were effective as of June 30, 2012.
Important Facts for Investors to Verify
- Whether the planned redemption of Series T preferred stock and potential repurchase of the Treasury warrant receive required approvals and how the transactions affect capital and future dividends.
- Whether non-performing assets, classified loans, troubled debt restructurings, and commercial-real-estate concentrations continue to decline.
- Whether the $4.7 million allowance remains adequate if real estate values, unemployment, or borrower performance deteriorate.
- Whether the remaining below-investment-grade and private-label mortgage-backed securities generate further impairment or realized losses.
- Whether mortgage origination fees remain elevated after refinancing activity and the Palmetto South contribution normalize.
- Whether lower asset yields and the company's interest-rate sensitivity pressure net interest income and margins.
- The filing's cash-flow presentation, liquidity facilities, regulatory capital ratios, and contractual credit commitments should be reconciled with subsequent filings and regulatory disclosures.