First Community Corporation — 2012 Q3 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company operating through First Community Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012, with comparisons to September 30, 2011 and December 31, 2011. The company reported 5,224,282 common shares outstanding as of November 13, 2012.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $4.329 million, versus $4.628 million | $13.289 million, versus $13.701 million |
| Provision for loan losses | $115 thousand, versus $360 thousand | $416 thousand, versus $1.110 million |
| Non-interest income | $2.402 million, versus $1.688 million | $5.720 million, versus $4.391 million |
| Non-interest expense | $4.823 million, versus $4.558 million | $14.343 million, versus $13.766 million |
| Net income | $1.220 million, versus $957 thousand | $2.947 million, versus $2.253 million |
| Net income available to common shareholders | $881 thousand, versus $790 thousand | $2.271 million, versus $1.751 million |
| Diluted EPS | $0.19, versus $0.24 | $0.60, versus $0.53 |
The nine-month taxable-equivalent net interest margin was 3.26%, compared with 3.33% in 2011. Third-quarter margin was 3.12%, compared with 3.37%. The yield on earning assets declined to 4.24% for the nine-month period and 3.99% for the quarter, while the cost of interest-bearing liabilities declined to 1.25% and 1.16%, respectively.
At September 30, 2012, total assets were $606.3 million, shareholders’ equity was $54.3 million, deposits were $474.5 million, Federal Home Loan Bank advances were $38.5 million, securities sold under repurchase agreements were $15.7 million, and junior subordinated debt was $17.9 million. The loan portfolio was $323.5 million, net loans were $318.8 million, and available-for-sale securities were $210.7 million.
Cash and cash equivalents were $20.4 million at September 30, 2012, compared with $16.5 million at December 31, 2011. Nine-month operating cash flow was $8.1 million; investing activities used $13.1 million and financing activities provided $8.9 million. Available-for-sale securities, interest-bearing bank balances and federal funds represented approximately 36.4% of total assets.
The allowance for loan losses was $4.7 million, or 1.45% of total loans. Net charge-offs were $420 thousand, compared with $1.313 million in the prior-year period. Non-performing assets were $10.5 million, or 1.73% of total assets, including $4.9 million of nonaccrual loans and $5.6 million of other real estate owned.
Material changes versus prior periods
- Nine-month net income increased approximately 31%, primarily because of lower loan-loss provision and higher non-interest income.
- Third-quarter net income increased approximately 27%, but diluted EPS declined because the common share count increased substantially following the July equity offering.
- Mortgage origination fees increased to $3.0 million for the first nine months and $1.4 million for the quarter, benefiting from Palmetto South Mortgage and refinancing activity.
- Net interest income declined because of lower asset yields and continued reinvestment at low interest rates, partially offset by lower deposit and borrowing costs.
- Total assets increased $12.4 million from year-end 2011. Deposits increased $9.9 million, while loans declined modestly by $0.8 million and investment securities increased.
- The company issued 1.875 million common shares at $8.00 per share on July 27, 2012, generating approximately $13.8 million of net proceeds.
- The company repurchased or redeemed its remaining Series T preferred stock after quarter-end. The quarter included $119 thousand of related nonrecurring expenses and approximately $159 thousand of remaining discount accretion.
- The Bank was released from its OCC Formal Agreement and individual minimum capital ratios effective June 28, 2012, and the company was released from its Federal Reserve memorandum of understanding effective July 10, 2012.
Guidance, outlook, risks and unusual items
No formal earnings guidance was provided. Management expected an effective tax rate of approximately 30% to 32% for the remainder of 2012 and stated that the company and Bank were expected to remain well capitalized for at least the next 12 months.
Management identified continued low loan demand, historically low interest rates, real-estate collateral exposure, and uncertain economic conditions as important operating challenges. The loan portfolio is heavily concentrated in commercial real estate, which represented approximately 69% of total loans. Future earnings could be affected by declining real estate values, additional credit losses, higher provisions, regulatory examinations, funding costs, deposit flows, competition, interest-rate changes and further other-than-temporary impairment charges.
The company held four below-investment-grade securities with a book value of approximately $1.7 million at September 30, 2012. It recorded $200 thousand of credit-related other-than-temporary impairment during the first nine months. Management stated that sales of below-investment-grade mortgage-backed securities materially reduced future impairment exposure, but additional losses remain possible.
The company was liability-sensitive within one year. Its modeled twelve-month net interest income sensitivity at September 30, 2012 was approximately positive 6.68% under a 200-basis-point rate increase and negative 12.56% under a 200-basis-point decrease. The company also had $44.8 million of commitments to extend credit, including $25.7 million of unused home-equity lines.
Effective October 1, 2012, the Bank converted from a national bank charter to a South Carolina state bank charter and became primarily regulated by the FDIC. On November 1, 2012, the company completed its $297,500 repurchase of the TARP warrant for 195,915 common shares, eliminating the U.S. Treasury’s remaining equity interest through TARP.
Most important facts for an investor to verify
- Whether lower net interest margins and asset yields persist and offset continued reductions in funding costs.
- The quality and valuation of the commercially concentrated, real-estate-secured loan portfolio, including $10.5 million of non-performing assets and $4.9 million of nonaccrual loans.
- The adequacy of the $4.7 million allowance for loan losses relative to classified loans, real estate values and future charge-offs.
- The valuation and remaining impairment risk of non-agency mortgage-backed securities and other available-for-sale investments.
- The sustainability of mortgage origination fee income after refinancing activity and the Palmetto South contribution.
- The effect of the July share issuance and TARP preferred-stock and warrant transactions on future EPS, capital and shareholder dilution.
- The company’s approximately $44.8 million of unfunded lending commitments and its ability to maintain liquidity under adverse deposit or credit conditions.
- The impact of the new state-bank charter, FDIC oversight and proposed Basel III capital requirements.