Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company operating through First Community Bank, with commercial and retail banking, mortgage banking, investment advisory and non-deposit, and corporate segments. This Form 10-Q covers the quarter and six months ended June 30, 2019. Financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 |
|---|---|---|
| Net income | $2.9 million | $5.4 million |
| Diluted EPS | $0.37 | $0.70 |
| Net interest income | $9.1 million | $18.1 million |
| Provision for loan losses | $9 thousand | $114 thousand |
| Non-interest income | $3.2 million | $5.7 million |
| Non-interest expense | $8.6 million | $17.0 million |
| Net interest margin | 3.64% | 3.66% |
- Total assets were $1.116 billion at June 30, 2019, compared with $1.092 billion at December 31, 2018.
- Gross loans were $726.7 million, up from $718.5 million at year-end 2018. Commercial mortgage loans represented 72.2% of gross loans.
- Total deposits were $937.4 million, up from $925.5 million. Non-interest-bearing deposits increased to $263.8 million from $244.7 million.
- Cash and cash equivalents were $39.6 million at June 30, 2019, compared with $32.3 million at December 31, 2018.
- Shareholders’ equity was $117.5 million, or 10.5% of total assets, compared with $112.5 million, or 10.3%, at year-end 2018.
- The allowance for loan losses was $6.4 million, or 0.88% of gross loans, versus $6.3 million, or 0.87%, at December 31, 2018.
- Non-performing assets were $4.1 million, or 0.36% of total assets. Nonaccrual loans were $2.7 million, and no loans were more than 90 days past due and still accruing.
- Debt and funding liabilities included $33.9 million of securities sold under repurchase agreements, $0.2 million of FHLB advances, and $15.0 million of junior subordinated debt.
Cash Flow, Liquidity and Capital
- Operating activities used $4.3 million of cash during the first six months of 2019, compared with $6.6 million provided in the prior-year period. The change principally reflected higher loan-held-for-sale origination activity and an increase in other assets.
- Investing activities used $1.3 million, versus $30.8 million used in the first six months of 2018. Financing activities provided $13.0 million, including deposit growth and repurchase-agreement funding.
- Interest-bearing bank balances and available-for-sale securities represented 22.4% of total assets and were identified by management as important liquidity resources.
- The company maintained $20.0 million of unused federal funds purchased lines and access to an FHLB credit line of up to 25% of the Bank’s assets, subject to collateral requirements.
- At June 30, 2019, the Bank’s leverage, Tier 1 risk-based, total risk-based, and Common Equity Tier 1 ratios were 10.2%, 13.5%, 14.2%, and 13.5%, respectively. Management stated that the Bank met all capital adequacy requirements and expected it to remain well capitalized for at least the next 12 months.
Material Changes Versus Prior Comparable Period
- Six-month net income declined 5.8% to $5.4 million from $5.7 million; diluted EPS declined to $0.70 from $0.74. Second-quarter net income declined to $2.9 million from $3.0 million, and diluted EPS declined to $0.37 from $0.39.
- Six-month net interest income increased $663 thousand, supported by higher average earning assets and a two-basis-point improvement in net interest margin to 3.66%. In the second quarter, net interest income rose $177 thousand, but margin declined three basis points to 3.64% as deposit funding costs increased faster than asset yields.
- Six-month non-interest income increased $153 thousand. Mortgage banking income, investment advisory fees, and net gains on securities sales improved, partially offset by lower deposit service charges and other income.
- Six-month non-interest expense increased $1.1 million, principally due to salaries and benefits, occupancy, and marketing costs associated with two new full-service offices opened in Greenville, South Carolina, and Evans, Georgia.
- Loan growth was modest, with gross loans increasing $8.2 million from year-end. Deposits increased $11.9 million, while the mix shifted toward non-interest-bearing and other core deposits.
- Accumulated other comprehensive income improved from a $2.3 million loss at year-end 2018 to $2.0 million of income, primarily due to unrealized gains on available-for-sale securities.
- The company reclassified its entire held-to-maturity securities portfolio to available-for-sale during the first quarter; no held-to-maturity securities remained at June 30, 2019.
- The company adopted the new lease standard on January 1, 2019, recording a $2.8 million right-of-use asset and a $2.8 million lease liability.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expected the effective tax rate to remain approximately 20.5% to 21.0% for the remainder of 2019 and stated that liquidity and capital were adequate for expected operating and funding needs.
- Management continues to focus on quality loan growth, core deposit growth, mortgage banking, and investment advisory activity. Mortgage loan production was $61.3 million in the first six months, and assets under management were $333.9 million at June 30, 2019.
- Approximately 91.3% of the loan portfolio was collateralized by real estate, creating sensitivity to real estate values and local economic conditions. Management highlighted risks from credit losses, unemployment, interest rates, deposit flows, funding access, regulatory actions, cybersecurity, and economic deterioration.
- Interest-rate risk remains material. Management reported that modeled net interest income would decline 2.69% under a 200-basis-point increase and 5.58% under a 200-basis-point decrease in short-term rates. The company was asset sensitive within one year.
- The company’s allowance methodology depends on judgments regarding borrower creditworthiness, collateral values, cash flows, economic conditions, and historical loss rates. Regulatory examinations could require additional provisions or asset write-downs.
- The Board authorized repurchases of up to 300,000 shares. The company repurchased 185,361 shares through June 30 at an average price of $18.41 and repurchased the remaining 114,639 shares in July 2019, for an overall average price of $18.79.
- Management reported no material changes to the risk factors in the 2018 Form 10-K, no material pending legal proceedings, and effective disclosure controls.
Important Facts for Investors to Verify
- Whether deposit repricing and higher funding costs continue to pressure net interest margin and earnings.
- The quality and concentration of the commercial real estate portfolio, including trends in nonaccrual loans, impaired loans, classified assets, and collateral values.
- Whether the $6.4 million allowance for loan losses remains adequate through a full economic cycle and under the expected transition to the current expected credit loss standard.
- The financial contribution and expense ramp of the two new branches, including whether deposit and loan growth justifies the increased operating costs.
- The effect of the completed 300,000-share repurchase on capital, share count, and future earnings per share.
- The company’s ability to maintain liquidity, capital adequacy, and dividend capacity if economic conditions, deposit flows, or regulatory requirements deteriorate.