First Community Corporation 2022 Form 10-K Summary
Business Context and Reporting Period
First Community Corporation is a South Carolina bank holding company for First Community Bank, serving small and mid-sized businesses, professionals and individuals through 22 full-service offices in South Carolina and Georgia. The filing covers the fiscal year ended December 31, 2022, with comparative information for 2021 and 2020. The company reported approximately $1.7 billion of assets, $980.9 million of loans, $1.4 billion of deposits and $118.4 million of shareholders’ equity at year-end.
The company opened a York County, South Carolina loan production office in March 2022 and converted it to a full-service banking office in October 2022.
Financial Performance and Key Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total assets | $1.673 billion | $1.585 billion | +5.6% |
| Total loans | $980.9 million | $863.7 million | +13.6% |
| Total deposits | $1.385 billion | $1.361 billion | +1.8% |
| Net interest income | $47.9 million | $45.3 million | +5.9% |
| Non-interest income | $11.6 million | $13.9 million | -16.8% |
| Non-interest expense | $41.3 million | $39.2 million | +5.2% |
| Net income | $14.6 million | $15.5 million | -5.5% |
| Diluted EPS | $1.92 | $2.05 | -6.3% |
| Net interest margin | 3.11% | 3.19% | -8 basis points |
| Return on average assets | 0.88% | 1.02% | -14 basis points |
| Return on average common equity | 11.99% | 11.22% | +77 basis points |
Net interest income increased because average earning assets grew 8.6% to approximately $1.5 billion. The benefit of balance-sheet growth was partly offset by a lower net interest margin, reflecting excess liquidity invested in lower-yielding securities, the runoff of higher-yielding PPP loans and changes in earning-asset mix.
Non-interest income declined primarily because mortgage banking income fell $2.4 million to $1.9 million. Mortgage production declined to $88.6 million from $142.1 million amid higher interest rates and limited housing inventory. Investment advisory fees and non-deposit commissions increased $484 thousand to $4.5 million.
Non-interest expense increased $2.1 million, driven primarily by higher salaries and benefits, legal and professional fees, ATM and data-processing costs, marketing, fraud expense and other real-estate costs. The efficiency ratio increased to 68.60% from 66.09%.
Cash Flow, Capital, Debt and Liquidity
- Operating activities provided $22.1 million of cash in 2022, compared with $57.9 million in 2021.
- Investing activities used $162.8 million, primarily reflecting a $116.8 million increase in loans and net investment-security purchases.
- Financing activities provided $109.0 million, including $24.1 million of deposit growth, $22.0 million of federal funds purchased, and $50.0 million of Federal Home Loan Bank advances.
- Cash and cash equivalents declined to $37.4 million from $69.0 million.
- Borrowings increased to approximately $155.7 million at year-end, including $68.7 million of repurchase agreements, $22.0 million of federal funds purchased, $50.0 million of FHLB advances and $15.0 million of junior subordinated debt.
- The $50.0 million of FHLB advances matured between January 17 and March 7, 2023, at interest rates of 4.15% to 4.63%.
- Management stated that the company had ample liquidity and sufficient capital to fund operations for at least the next 12 months. The bank maintained $65.0 million of federal funds purchased lines and a $10.0 million Federal Reserve Discount Window line.
- The bank remained well capitalized. At December 31, 2022, Tier 1 risk-based capital was 13.49%, total risk-based capital was 14.54%, CET1 was 13.49%, and Tier 1 leverage was 8.63%.
- Uninsured deposits totaled $407.0 million, including $59.5 million of collateralized public funds. The company had no brokered or listing-service deposits.
- Unused lending commitments increased to $156.9 million from $137.4 million, including $47.3 million of unused home equity lines.
Material Changes Versus the Prior Comparable Period
- Loans grew $117.2 million, or 13.6%, while deposits grew only $24.1 million, increasing the year-end loan-to-deposit ratio to 70.9% from 64.0%.
- Commercial real estate loans increased 12.2% to approximately $709.2 million. Commercial real estate and commercial construction loans totaled approximately $788.9 million, or 80.4% of the loan portfolio.
- The allowance for loan losses increased modestly to $11.3 million, but declined as a percentage of loans to 1.16% from 1.29%. The company recorded a $152 thousand credit, rather than a $335 thousand provision, and reported net recoveries of $309 thousand.
- Asset quality weakened from the exceptionally low 2021 level. Nonperforming assets increased to $5.8 million, or 0.35% of assets, from $1.4 million, or 0.09%. Nonaccrual loans increased to $4.9 million from $250 thousand, primarily because of a $4.1 million commercial real estate loan and a smaller customer relationship placed on nonaccrual status.
- The company reclassified $224.5 million of securities from available-for-sale to held-to-maturity in June 2022. At year-end, the securities portfolio had $15.7 million of pretax unrealized losses related to the transferred securities and $12.4 million after tax.
- Accumulated other comprehensive loss increased sharply, contributing to a $22.6 million decline in shareholders’ equity to $118.4 million. The equity-to-assets ratio declined to 7.08% from 8.90%.
- The company paid quarterly dividends of $0.13 per share in 2022, compared with $0.12 in 2021. The board authorized a $0.14 per share dividend payable in February 2023. No shares were repurchased under the 2022 authorization.
- Fourth-quarter 2022 net income was $4.0 million, or $0.53 diluted EPS, compared with $3.9 million, or $0.52 diluted EPS, in the fourth quarter of 2021. Fourth-quarter net interest income increased to $13.4 million, while non-interest income declined to $2.5 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects an effective tax rate of approximately 21.25% to 21.75%, assuming current tax rates and the existing mix of tax-exempt securities and bank-owned life insurance.
- The company adopted the CECL credit-loss model on January 1, 2023. Management estimated an allowance increase of approximately zero to $50 thousand, an unfunded-commitment liability of approximately $350 thousand to $450 thousand and a net-of-tax retained-earnings reduction of approximately $275 thousand to $395 thousand. The regulatory-capital impact was expected to be insignificant.
- Interest-rate risk increased as the bank became liability sensitive at year-end. Management’s model estimated that a parallel 100-basis-point rate increase would reduce subsequent 12-month net interest income by 1.82%, while a 100-basis-point decrease would increase it by 3.13%.
- The principal credit risk is the concentration in commercial real estate and other real-estate-secured lending. Non-owner-occupied commercial real estate exposure was approximately 272% of bank risk-based capital, below the 300% supervisory indicator but subject to continued monitoring.
- Rising interest rates, inflation, weaker real estate values, deposit competition and economic deterioration could reduce margins, increase funding costs and raise credit losses.
- The securities portfolio had substantial unrealized losses because of higher market rates. Management did not consider the losses other-than-temporary and stated that it had the ability and intent to hold the securities until maturity or recovery.
- The company had $15.5 million of LIBOR-based loans, $48.1 million of LIBOR-based securities and $15.0 million of junior subordinated debt indexed to LIBOR at year-end. New loan originations and renewals no longer relied on LIBOR.
- Subsequent to year-end, the failures of two unrelated financial institutions in March 2023 caused sector-wide market volatility. Management reported no significant change in the company’s deposit balances through the financial-statement issuance date.
- Management reported no pending or threatened legal proceeding expected to have a material effect, and the independent auditor issued an unqualified opinion on the financial statements. The critical audit matter was the allowance for loan losses.
Most Important Facts for Investors to Verify
- Whether commercial real estate concentrations and the increase in nonaccrual loans lead to higher provisions, charge-offs or regulatory scrutiny.
- Actual deposit trends, uninsured deposit balances, deposit pricing and reliance on short-term borrowings after the March 2023 banking-sector stress.
- The final CECL adoption entry and its effect on retained earnings, allowance levels and regulatory capital.
- The duration, liquidity and unrealized-loss profile of the available-for-sale and held-to-maturity securities portfolios.
- Whether higher interest rates continue to compress net interest margin and reduce mortgage production and mortgage banking income.
- The maturity and refinancing terms of the $50.0 million of FHLB advances and other short-term borrowings.
- The sustainability of dividends given lower equity-to-assets, regulatory capital requirements and the bank’s role as the parent company’s primary cash-flow source.
- Actual operating cash flow and liquidity availability relative to the company’s $156.9 million of unused lending commitments.