First Community Corporation — 2017 Q1 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company operating commercial and retail banking, mortgage banking, investment advisory and non-deposit businesses. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to March 31, 2016 and balance-sheet comparisons to December 31, 2016. Dollar amounts are in thousands unless otherwise stated.
Financial performance and condition
| Metric | Q1 2017 | Comparable period or date | Change |
|---|---|---|---|
| Net interest income | $7,061 | $6,337 | +11.4% |
| Net interest margin, tax-equivalent | 3.52% | 3.33% | +19 basis points |
| Provision for loan losses | $116 | $140 | -$24 |
| Non-interest income | $1,978 | $2,089 | -5.3% |
| Non-interest expense | $6,720 | $6,342 | +6.0% |
| Income before tax | $2,203 | $1,944 | +13.3% |
| Net income | $1,756 | $1,468 | +19.6% |
| Diluted earnings per share | $0.26 | $0.22 | +18.2% |
| Comprehensive income | $2,119 | $3,265 | -35.1% |
- Total assets were $914.9 million at March 31, 2017, essentially unchanged from $914.8 million at year-end 2016.
- Gross loans increased to $555.3 million from $546.7 million. Commercial mortgage loans increased to $397.2 million, while construction loans declined to $32.4 million.
- Deposits increased to $775.6 million from $766.6 million. The loan-to-deposit ratio was 72.1% at both March 31, 2017 and December 31, 2016.
- Investment securities declined to $262.5 million from $270.6 million based on the balance-sheet categories presented.
- Cash and cash equivalents increased to $30.1 million from $22.0 million at year-end. Operating activities provided $9.0 million of cash; investing activities used $0.3 million; financing activities used $0.6 million.
- Total liabilities were $831.8 million and shareholders’ equity was $83.1 million, or 9.1% of assets.
- Federal Home Loan Bank advances declined to $15.5 million from $24.0 million. Junior subordinated debt was $15.0 million, and repurchase-agreement borrowings were $19.4 million.
- The allowance for loan losses was $5.4 million, or 0.97% of gross loans. Net recoveries were $38 thousand in Q1 2017, compared with net charge-offs of $49 thousand in Q1 2016.
- Non-performing assets were $4.7 million, or 0.52% of assets, compared with $5.2 million, or 0.57%, at December 31, 2016. Nonaccrual loans were $3.5 million; loans over 90 days past due and still accruing were $108 thousand.
- The Bank reported March 31, 2017 leverage, Tier 1 risk-based and total risk-based capital ratios of 9.8%, 14.0% and 14.9%, respectively. Management stated that the Company and Bank met applicable capital requirements and expected to remain well capitalized for at least the next 12 months.
Material changes versus the prior comparable period
- Net income benefited principally from a $724 thousand increase in net interest income, higher average earning assets and a lower cost of interest-bearing liabilities.
- Average earning assets increased by $46.4 million. Loans represented 66.5% of average earning assets in Q1 2017 versus 62.1% in Q1 2016.
- The tax-equivalent net interest margin improved to 3.52% from 3.33%, although management noted an approximately nine-basis-point benefit from collecting interest on several nonaccrual loans that paid off.
- Mortgage banking income was broadly stable at $670 thousand. Investment advisory and non-deposit commissions declined to $258 thousand from $291 thousand.
- Non-interest expense increased $378 thousand, primarily due to higher salaries and benefits, additional employees and increased marketing costs. Full-time equivalent employees increased to 196 from 193.
- The effective tax rate declined to 20.3% from 24.5%, including an approximately $115 thousand benefit from the new accounting treatment for excess tax benefits related to share-based compensation.
- Other comprehensive income declined to $363 thousand from $1.8 million because available-for-sale securities generated a smaller unrealized gain.
Outlook, commentary, risks and unusual items
- On April 11, 2017, the Company agreed to acquire Cornerstone Bancorp, subject to shareholder and regulatory approvals. The transaction is expected to close in early Q4 2017. Based on March 31 share counts, the Company expected to issue approximately 877,000 shares and pay approximately $7.7 million in cash. Completion is not assured.
- The Company prepaid $2.5 million of an FHLB advance and recorded a $58 thousand early-extinguishment loss and penalty during the quarter.
- Management expects the effective tax rate to be approximately 26% to 27% for the remainder of 2017 and stated that no additional share-based payment settlements or vesting events were scheduled for the remainder of the year.
- Approximately 91.3% of the loan portfolio was collateralized by real estate at March 31, 2017. Management highlighted risks from real-estate values, economic conditions, interest rates, unemployment, borrower payment behavior and the adequacy of the allowance.
- Management identified one current substandard loan relationship totaling approximately $1.1 million as a potential problem credit.
- Liquidity was considered adequate. Interest-bearing bank balances, federal funds sold and available-for-sale securities represented 28.6% of assets. The Company also had $20.0 million of unused federal-funds lines and an FHLB credit line of up to 25% of Bank assets, subject to collateral requirements.
- Interest-rate risk remains material. The Company was asset-sensitive within one year; modeled net interest income increased 0.65% under a 200-basis-point rate increase and declined 8.87% under a 200-basis-point decrease.
- The filing identifies additional risks involving regulatory restrictions, cybersecurity, competition, deposit flows, funding access, capital requirements, accounting estimates, natural disasters and the ability to retain customers and personnel.
- Management reported no material pending legal proceedings, no material changes in internal control over financial reporting and effective disclosure controls.
Most important facts for investors to verify
- Whether the proposed Cornerstone merger receives shareholder and regulatory approvals, closes on schedule and conforms to the stated cash and share consideration.
- Whether commercial real-estate concentration and the identified potential problem loan lead to higher delinquencies, charge-offs or provisions.
- Whether loan growth and the shift from securities to loans can be sustained without weakening asset quality or liquidity.
- Whether the improved net interest margin persists after the nonrecurring benefit from nonaccrual-loan payoffs and amid changing interest rates.
- Whether higher compensation, marketing and other operating costs pressure efficiency and earnings.
- Whether tax expense normalizes toward management’s projected 26%–27% range after the Q1 share-based compensation benefit.
- Whether capital ratios remain comfortably above regulatory minimums after any merger-related cash payment, stock issuance and balance-sheet growth.