Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company for First Community Bank, a commercial and retail community bank serving the Midlands of South Carolina and the Central Savannah River Area of South Carolina and Georgia. The Bank operated 15 full-service offices and a mortgage loan production office and had 186 full-time employees at December 31, 2015.
This Form 10-K covers the fiscal year ended December 31, 2015. Fourth-quarter 2015 information is unaudited and is included below where relevant. The filing was dated March 16, 2016.
Financial Performance and Key Metrics
| Metric | 2015 | 2014 | Change or comment |
|---|---|---|---|
| Total assets | $862.7 million | $812.4 million | Increased $50.3 million, or approximately 6.2% |
| Loans, excluding loans held for sale | $489.2 million | $443.8 million | Increased $45.3 million, or 10.2% |
| Total deposits | $716.2 million | $669.6 million | Increased $46.6 million |
| Net interest income | $25.3 million | $23.7 million | Increased $1.5 million |
| Provision for loan losses | $1.1 million | $0.9 million | Increased from the prior year |
| Non-interest income | $9.0 million | $8.2 million | Supported by higher mortgage banking income and securities gains |
| Non-interest expense | $24.7 million | $24.0 million | Increased $0.7 million |
| Net income | $6.1 million | $5.1 million | Increased approximately 20% |
| Diluted EPS | $0.91 | $0.78 | Improved despite modestly higher diluted share count |
| Net interest margin, tax equivalent | 3.38% | 3.40% | Declined 2 basis points |
| Efficiency ratio | 71.25% | 74.14% | Improved |
| Return on average assets | 0.73% | 0.73% | Stable |
| Return on average common equity | 7.94% | 8.13% | Declined modestly |
Net interest income benefited primarily from a $55.3 million increase in average earning assets. The yield on earning assets declined to 3.72% from 3.82%, while the cost of interest-bearing liabilities declined to 0.56% from 0.62%. Management noted that payoffs of two purchased impaired loans contributed approximately five basis points to the 2015 margin.
Fourth-quarter net income was $1.6 million, compared with $1.5 million in the fourth quarter of 2014. Fourth-quarter diluted EPS was $0.24 versus $0.22 in the prior-year quarter. Fourth-quarter net interest income was $6.3 million, compared with $6.2 million, and the provision for loan losses was $148 thousand versus $179 thousand.
Cash Flow, Liquidity, Debt and Capital
- Cash provided by operating activities was $14.5 million, compared with $12.0 million in 2014.
- Investing activities used $58.0 million, principally reflecting a $45.5 million increase in loans, purchases of investment securities and a $5.3 million purchase of bank-owned life insurance.
- Financing activities provided $43.9 million, primarily from a $46.7 million increase in deposits, partially offset by FHLB advance repayments and common dividends.
- Cash and cash equivalents ended the year at $22.9 million, compared with $22.5 million at December 31, 2014. Management stated that liquidity was adequate for operating and loan-funding needs.
- FHLB advances declined to $24.8 million from $28.8 million. Securities sold under repurchase agreements increased to $21.0 million from $17.4 million, and junior subordinated debt declined to $15.0 million after a $500 thousand redemption.
- Total shareholders’ equity was $79.0 million, or 9.16% of assets, compared with $74.5 million, or 9.17%, in 2014.
- At December 31, 2015, the Company reported Tier 1, total risk-based, CET1 and leverage ratios of 15.4%, 16.2%, 12.9% and 10.2%, respectively. The Bank reported 14.7%, 15.5%, 14.7% and 9.7%. The Bank was deemed well capitalized.
- The quarterly common dividend increased to $0.07 per share in 2015 from $0.06 per share in 2014, for total 2015 dividends of $0.28 per share.
Asset Quality and Material Changes
- Non-performing assets declined to $7.3 million, or 0.85% of assets, from $9.5 million, or 1.17%, in 2014.
- Non-performing loans declined to 0.99% of period-end loans from 1.48%. Nonaccrual loans declined to $4.8 million from $6.6 million.
- Net charge-offs declined to $774 thousand from $968 thousand, while the allowance for loan losses increased to $4.6 million from $4.1 million, or 0.94% of loans.
- Commercial real estate and commercial construction loans totaled approximately $359.3 million, or 73.4% of the loan portfolio. Approximately 90.5% of loans had real estate as a primary or secondary collateral component.
- Commercial mortgage loans increased 11.5%, or $33.8 million, from year-end 2014. This growth contributed to higher concentration and regulatory scrutiny risk.
- The Company funded approximately $116.5 million of new loan production during 2015 and grew deposits organically, with core deposits increasing to $635.4 million from $582.6 million.
- Non-interest expense increased despite the absence of merger-related expenses in 2015. Higher salaries, occupancy, equipment, marketing and intangible amortization reflected the full-year impact of acquired and newly opened offices.
- Non-interest income benefited from mortgage banking income of $3.4 million, a $355 thousand gain on securities sales and a reduction in debt-extinguishment losses. The Company also recognized a $130 thousand gain on the redemption of $500 thousand of junior subordinated debt.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management described continued loan and deposit growth as strategic priorities and stated that the Bank expected to remain well capitalized and liquid for at least the next 12 months. Management estimated a 2016 effective tax rate of approximately 27% to 30%.
On February 18, 2015, the Bank entered into an FDIC consent order concerning Bank Secrecy Act and anti-money-laundering controls. The Bank implemented corrective actions, and the FDIC advised on January 28, 2016 that the order had been terminated. Investors should verify whether related compliance costs, monitoring or regulatory requirements continue.
- Credit risk remains concentrated in commercial real estate, construction and other real-estate-secured lending, particularly in the Company’s local markets.
- Actual credit losses could exceed the allowance, and regulators may require additional provisions, charge-offs or capital.
- Interest-rate changes could compress margins. The Company reported an asset-sensitive balance sheet; its model estimated that a 100-basis-point increase would raise next-12-month net interest income by 0.89%, while a 100-basis-point decline would reduce it by 3.55%.
- Unrealized investment-security losses totaled $1.8 million for available-for-sale securities and $27 thousand for held-to-maturity securities at year-end. Management did not consider these losses other-than-temporary.
- Competition for deposits, loans and personnel, cybersecurity threats, regulatory changes, FDIC assessment costs and local economic or real-estate deterioration could adversely affect results.
- The Company had $68.7 million of commitments to extend credit, including lines of credit, at December 31, 2015. Management did not believe pending litigation was material.
- The Company’s registered public accounting firm issued an unqualified opinion on the consolidated financial statements. The auditor did not provide an attestation report on internal control because the Company qualified for the applicable smaller-reporting-company exemption; management nevertheless concluded controls were effective.
Important Facts for Investors to Verify
- Reconcile reported annual and fourth-quarter earnings with the audited financial statements and unaudited quarterly table.
- Review commercial real estate concentration, loan growth, criticized loans, nonaccrual loans and the adequacy of the $4.6 million allowance.
- Assess the sustainability of the 3.38% net interest margin as rates rise and deposit costs reprice.
- Confirm liquidity availability, collateral requirements and maturity schedules for FHLB advances, repurchase agreements and junior subordinated debt.
- Verify the termination and any continuing obligations associated with the FDIC BSA/anti-money-laundering consent order.
- Evaluate dividend capacity in light of regulatory restrictions, capital conservation buffers and the Bank’s ability to upstream dividends to the holding company.
- Distinguish recurring earnings from securities gains, purchased-loan accretion, debt-extinguishment gains and other acquisition-related or unusual items.