First Community Corporation — 2013 Q3 Form 10-Q Summary
Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company whose principal subsidiary is First Community Bank. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared primarily with the corresponding 2012 periods and December 31, 2012 balances.
Key Financial Metrics
| Metric | Q3 2013 | Nine months 2013 | Comparable period |
|---|---|---|---|
| Net income | $1.046 million | $3.287 million | Q3 2012: $1.220 million; nine months 2012: $2.947 million |
| Net income available to common shareholders | $1.046 million | $3.287 million | Q3 2012: $0.881 million; nine months 2012: $2.271 million |
| Diluted EPS | $0.20 | $0.62 | Q3 2012: $0.19; nine months 2012: $0.60 |
| Net interest income | $4.570 million | $13.272 million | Q3 2012: $4.329 million; nine months 2012: $13.289 million |
| Net interest margin, fully tax equivalent | 3.18% | 3.15% | Q3 2012: 3.12%; nine months 2012: 3.26% |
| Non-interest income | $1.941 million | $6.319 million | Q3 2012: $2.402 million; nine months 2012: $5.720 million |
| Non-interest expense | $4.957 million | $14.719 million | Q3 2012: $4.823 million; nine months 2012: $14.343 million |
| Provision for loan losses | $129 thousand | $379 thousand | Q3 2012: $115 thousand; nine months 2012: $416 thousand |
For the nine months, net income increased 11.5%, while net income available to common shareholders increased 44.7%, benefiting from the redemption of all preferred stock in 2012 and the elimination of related dividends and redemption costs. Third-quarter net income declined 14.3%, primarily because mortgage banking income fell $623 thousand as refinancing activity slowed.
Financial Position, Cash Flow, Debt and Liquidity
- Total assets were $635.9 million at September 30, 2013, up $33.0 million, or 5.5%, from December 31, 2012.
- Gross loans increased to $345.1 million from $332.1 million; investment securities increased to $228.4 million from $203.4 million.
- Total deposits increased to $508.6 million from $475.0 million, driven by growth in demand, transaction, money market and savings deposits. The loan-to-deposit ratio declined to 67.8% from 69.9%.
- Debt included $34.3 million of Federal Home Loan Bank advances, $17.1 million of securities sold under repurchase agreements and $15.5 million of junior subordinated debt. Total reported debt declined modestly from December 31, 2012, primarily due to lower FHLB advances.
- Cash and cash equivalents were $20.95 million at September 30, 2013, compared with $18.71 million at December 31, 2012. Nine-month operating cash flow was $18.1 million, investing cash flow was negative $47.7 million, and financing cash flow was $31.9 million.
- Management stated that liquidity was adequate for operating and loan-funding requirements. Interest-bearing bank balances, federal funds sold and available-for-sale securities represented 37.5% of total assets. The company had $108.0 million of commitments to extend credit, including $24.6 million of unused home-equity lines.
- Shareholders’ equity was $52.9 million, or 8.3% of assets, versus $54.2 million, or 9.0%, at year-end 2012. The decline primarily reflected a $4.0 million after-tax loss in accumulated other comprehensive income from available-for-sale securities.
- The Bank’s September 30, 2013 leverage, Tier 1 risk-based and total risk-based capital ratios were 10.21%, 16.62% and 17.74%, respectively. Management expected both the Bank and Company to remain well capitalized for at least the next 12 months.
Asset Quality and Margins
- The allowance for loan losses declined to $4.3 million, or 1.25% of total loans, from $4.6 million, or 1.39%, at year-end 2012.
- Net charge-offs were $677 thousand for the first nine months, compared with $420 thousand in 2012. Non-performing assets were $8.7 million, or 1.37% of assets, versus $8.8 million, or 1.45%, at year-end 2012.
- Nonaccrual loans were $5.1 million. Loans classified as impaired totaled $5.6 million, down from $6.2 million at December 31, 2012. Commercial real estate represented the largest concentration of impaired loans and the largest loan category.
- The nine-month fully tax-equivalent net interest margin declined to 3.15% from 3.26%, as earning-asset yields fell 50 basis points to 3.74%. Lower funding costs, which declined to 0.83% from 1.25%, and higher average earning assets substantially offset the yield pressure.
- For the third quarter, the net interest margin improved to 3.18% from 3.12%, despite a lower earning-asset yield, because funding costs declined and average earning assets increased.
Material Changes, Outlook and Risks
- The company entered into an agreement to acquire Savannah River Financial Corporation. Consideration is structured as approximately 60% cash and 40% First Community common stock. Based on September 30 share data, the transaction was expected to require approximately $19.8 million of cash and issuance of approximately 1.274 million to 1.597 million shares. Closing was expected in the first quarter of 2014, subject to shareholder and regulatory approvals.
- Mortgage banking revenue weakened in the third quarter as rising mortgage rates reduced refinancing activity. Management stated that industry-wide refinancing volume was expected to continue declining, potentially reducing mortgage-related revenue.
- Investment advisory fees increased as assets under management rose to approximately $113.5 million from $86.4 million a year earlier.
- The company recorded no other-than-temporary impairment charge on securities in 2013, compared with a $200 thousand credit-component charge in the first nine months of 2012. However, available-for-sale securities had $4.4 million of gross unrealized losses at September 30, 2013, and valuation depends on assumptions regarding defaults, prepayments and loss severity.
- Management identified real-estate collateral values, credit losses, loan-loss allowance adequacy, regulatory examinations, interest-rate changes, deposit flows, funding access, capital requirements, cybersecurity and economic conditions as significant risks.
- The company was slightly liability-sensitive within one year. Management’s interest-rate simulation estimated that a parallel 200-basis-point increase would raise next-twelve-month net interest income by 3.04%, while a 200-basis-point decrease would reduce it by 11.79%. These estimates depend on modeling assumptions.
- Management stated that no material legal proceedings were pending and that disclosure controls were effective. The filing text does not provide a separate 2013 full-year earnings guidance figure.
Investor Verification Priorities
- Verify completion terms, regulatory and shareholder approvals, final consideration and dilution related to the Savannah River merger.
- Monitor mortgage banking revenue, refinancing volumes and the effect of interest-rate changes on net interest margin.
- Reconcile future charge-offs, nonaccrual loans, classified loans and the allowance for loan losses, particularly within commercial real estate.
- Review the fair value and unrealized-loss exposure of the available-for-sale securities portfolio, including private-label mortgage-backed securities.
- Assess liquidity after funding merger consideration and loan growth, including the $108.0 million of unfunded credit commitments.
- Confirm continued compliance with regulatory capital requirements and the effect of Basel III implementation beginning in 2015.