Business Context and Reporting Period
First Community Corporation is a South Carolina-based bank holding company whose primary activities are commercial and retail banking, mortgage banking, investment advisory and non-deposit services, and corporate activities. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Dollar amounts are in thousands unless otherwise stated.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net income | $2,898 in 2019 vs. $2,833 in 2018 | $8,274 in 2019 vs. $8,543 in 2018 |
| Diluted EPS | $0.39 vs. $0.37 | $1.08 vs. $1.11 |
| Net interest income | $9,353 vs. $8,883 | $27,489 vs. $26,356 |
| Net interest margin | 3.62% vs. 3.55% | 3.65% vs. 3.61% |
| Non-interest income | $3,113 vs. $2,842 | $8,808 vs. $8,384 |
| Non-interest expense | $8,790 vs. $8,134 | $25,753 vs. $23,953 |
| Provision for loan losses | $25 vs. $21 | $139 vs. $252 |
- Balance sheet: Total assets were $1.130 billion at September 30, 2019, compared with $1.092 billion at December 31, 2018. Gross loans increased to $735.1 million from $718.5 million, while net loans were $728.5 million.
- Deposits and funding: Total deposits increased to $948.8 million from $925.5 million. Securities sold under repurchase agreements were $34.3 million, Federal Home Loan Bank advances were $0.2 million, and junior subordinated debt was $15.0 million.
- Liquidity: Cash and cash equivalents were $33.2 million at September 30, 2019. Interest-bearing bank balances, federal funds sold and available-for-sale securities represented 24.6% of total assets. Management stated that liquidity was adequate for operating and loan-funding needs for at least the next 12 months.
- Cash flow: Operating activities provided $2.8 million, investing activities used $23.8 million, and financing activities provided $21.9 million during the first nine months of 2019. Ending cash and cash equivalents were $33.2 million versus $36.9 million a year earlier.
- Credit quality: The allowance for loan losses was $6.6 million, or 0.89% of total loans, versus $6.3 million, or 0.87%, at December 31, 2018. Non-performing assets were $3.7 million, or 0.33% of assets, compared with $4.0 million, or 0.37%.
- Capital: Shareholders’ equity was $118.8 million, or 10.5% of assets, compared with $112.5 million, or 10.3%, at year-end. The Bank’s September 30, 2019 leverage, Tier 1 risk-based, total risk-based, and Common Equity Tier 1 ratios were 10.1%, 13.4%, 14.2%, and 13.4%, respectively, and management stated that the Bank remained well capitalized.
Material Changes Versus Prior Comparable Period
- Nine-month net income declined $269 thousand despite higher net interest income and non-interest income, primarily because non-interest expense increased $1.8 million.
- Third-quarter net income increased $65 thousand, supported by higher net interest income and non-interest income, partially offset by a $656 thousand increase in non-interest expense.
- Net interest income benefited from higher average earning assets and improved net interest margin. However, the cost of interest-bearing liabilities increased to 0.81% from 0.52% for the nine-month periods.
- Salary and benefit expense increased $1.3 million for the nine-month period, largely due to normal salary adjustments and staffing for two new full-service offices opened in Greenville, South Carolina, and Evans, Georgia.
- Mortgage banking income increased to $3.3 million from $3.1 million, and investment advisory and non-deposit fees increased to $1.4 million from $1.2 million. Assets under management increased to $339.6 million from $306.8 million.
- Loan balances increased $16.6 million from year-end, with commercial mortgage loans rising to $534.6 million while residential mortgage loans declined to $47.7 million.
- Available-for-sale securities increased to $265.1 million from $237.9 million. The Company reclassified its $16.1 million held-to-maturity portfolio to available-for-sale during the first quarter. Unrealized gains on available-for-sale securities contributed $5.6 million to other comprehensive income for the nine months.
- The Company completed repurchases of 300,000 shares under its May 2019 plan at an average price of $18.79 per share and authorized a new plan for up to 200,000 additional shares; no shares had been repurchased under the new plan as of September 30.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings or revenue guidance. It expected the effective tax rate to remain approximately 20.5% to 21.0% for the remainder of 2019.
- Management noted that Federal Reserve rate reductions and a flat yield curve could place downward pressure on net interest margin. A $131 thousand recovery of non-accrual interest in the third quarter temporarily benefited net interest income; excluding it, third-quarter net interest margin would have been 3.57%.
- The Company is asset-sensitive within one year. Its modeled 12-month net interest income sensitivity at September 30, 2019 was negative 1.22% for a 100-basis-point increase, negative 2.87% for a 200-basis-point increase, and negative 5.32% for a 200-basis-point decrease.
- Approximately 91.1% of the loan portfolio was collateralized by real estate. Management identified credit losses, declining real estate values, interest rates, unemployment, economic conditions, deposit flows, funding access, regulatory actions, cybersecurity, competition, litigation, and accounting changes as material risks.
- The Company had $127 million of commitments to extend credit, including $40 million of unused home equity lines. These commitments are subject to normal underwriting and may expose the Company to future funding and credit risk.
- The Company adopted the new lease standard in 2019, recording right-of-use assets and lease liabilities. Total lease liability at September 30, 2019 was $3.3 million.
- The expected credit loss standard was under evaluation. The filing discussed a proposed delay for smaller reporting companies, but the source text does not provide a final recorded implementation impact.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no subsequent events requiring accrual or disclosure.
Important Facts for Investors to Verify
- Whether the higher interest-bearing deposit costs and subsequent rate cuts reduce net interest margin and earnings.
- The sustainability of loan growth, particularly the concentration in commercial real estate loans.
- The adequacy of the $6.6 million allowance for loan losses under a full economic cycle or weaker real estate conditions.
- The effect of new branch operating costs, staffing, data-processing expenses, and other non-interest expenses on efficiency and profitability.
- The final accounting and capital impact of the expected credit loss standard and the Company’s potential election under the community bank leverage ratio framework.
- Execution of the new 200,000-share repurchase authorization and its effect on capital, liquidity, and per-share results.
- Regulatory capital levels, dividend capacity, deposit stability, and availability of unused borrowing lines.