First Community Corporation — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended September 30, 2022, compared primarily with September 30, 2021; balance-sheet comparisons are with December 31, 2021. First Community Corporation is the holding company for First Community Bank, a South Carolina community bank providing commercial and retail banking, mortgage banking, and investment advisory services.
Financial Performance and Position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net interest income | $12.8 million | $12.5 million | $34.6 million | $34.1 million |
| Net interest margin | 3.26% | 3.43% | 3.01% | 3.27% |
| Non-interest income | $2.7 million | $3.6 million | $9.1 million | $10.3 million |
| Non-interest expense | $10.4 million | $9.9 million | $30.6 million | $29.3 million |
| Net income | $4.0 million | $4.7 million | $10.6 million | $11.5 million |
| Diluted EPS | $0.52 | $0.63 | $1.39 | $1.53 |
- Total assets were $1.652 billion at September 30, 2022, up $67.3 million from year-end 2021.
- Loans held for investment increased to $950.2 million from $863.7 million. Commercial mortgage loans represented 73.5% of the portfolio, and approximately 91% of loans were collateralized by real estate.
- Deposits increased to $1.436 billion from $1.361 billion. Uninsured deposits totaled $437.0 million, including $24.7 million of time deposits exceeding the FDIC insurance limit.
- Cash and cash equivalents were $38.3 million at September 30, 2022, compared with $69.0 million at December 31, 2021. Management stated that liquidity was adequate for at least the next 12 months.
- Investment securities totaled approximately $573.6 million. On June 1, 2022, the Company transferred $224.5 million of securities from available-for-sale to held-to-maturity.
- Shareholders’ equity declined to $114.1 million, or 6.9% of assets, from $141.0 million, or 8.9%, primarily because of a $36.5 million after-tax decline in accumulated other comprehensive income caused by higher interest rates.
- Debt included $73.7 million of securities sold under repurchase agreements and $15.0 million of junior subordinated debt.
- The Bank remained well capitalized at September 30, 2022, with an 8.53% leverage ratio, 13.42% Common Equity Tier 1 ratio, 13.42% Tier 1 ratio, and 14.49% total capital ratio.
- Operating cash flow for the first nine months was $17.8 million, compared with $53.9 million in the prior-year period. Investing activities used $142.1 million, primarily for securities purchases and loan growth, while financing activities provided $93.5 million.
Material Changes Versus Prior Periods
- Net income declined 16.4% in the third quarter and 8.5% for the first nine months. The principal drivers were lower mortgage banking income and higher operating expenses.
- Net interest income increased modestly because average earning assets grew, but the net interest margin declined 17 basis points in Q3 and 26 basis points for the nine-month period.
- Mortgage banking income fell to $290,000 in Q3 from $1.1 million and to $1.6 million for nine months from $3.3 million. Mortgage production declined to $17.4 million in Q3 and $68.4 million for nine months, versus $32.2 million and $108.6 million, respectively.
- Investment advisory and non-deposit commission income increased to $3.4 million for nine months from $2.9 million, although assets under management fell to $529.5 million from $588.6 million at September 30, 2021 and $650.9 million at December 31, 2021.
- The allowance for loan losses was $11.3 million, or 1.19% of loans, compared with $11.2 million, or 1.29%, at year-end 2021. The Company recorded a $177,000 release of provision for the first nine months, versus a $394,000 provision in the prior-year period.
- Credit metrics weakened: nonaccrual loans increased to $4.9 million from $250,000 at year-end 2021, and non-performing assets increased to $5.9 million, or 0.36% of assets, from $1.4 million, or 0.09%. The increase was primarily related to a $4.1 million loan placed on nonaccrual status in June 2022 and a $508,000 customer relationship placed on nonaccrual status in September.
- Non-interest expense increased 4.2% for nine months, including higher salaries, occupancy, marketing, legal and professional fees, technology costs, and fraud expense.
Outlook, Risks, and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expects investment advisory fees to decline in the fourth quarter because those fees trail the decline in assets under management.
- Management began offering 5/1, 7/1, and 10/1 adjustable-rate mortgage products in response to higher interest rates and reduced fixed-rate mortgage demand. Holding these loans for investment supports loan growth and interest income but reduces mortgage gain-on-sale income.
- Rising inflation and Federal Reserve rate increases affected securities values, mortgage demand, net interest margins, and shareholders’ equity. The federal funds target range reached 3.00%–3.25% at September 30, 2022.
- Available-for-sale securities had $26.1 million of unrealized losses, and held-to-maturity securities had $16.4 million of unrealized losses. Management did not consider the securities other-than-temporarily impaired and stated it had the intent and ability to hold them to recovery or maturity.
- The Company expects to adopt the Current Expected Credit Loss model in the first quarter of 2023 and expects a one-time cumulative-effect adjustment to the allowance for loan losses. The filing states that the amount and broader impact cannot yet be reasonably determined.
- Key risks include commercial real estate concentration, credit losses, declining collateral values, deposit competition and liquidity, interest-rate volatility, inflation, COVID-19 effects, cybersecurity, regulatory examinations, changing accounting standards, and economic or geopolitical disruption, including the war in Ukraine.
- The Board approved a repurchase authorization for up to 375,000 shares through December 31, 2023; no repurchases had been made through September 30, 2022. A quarterly dividend of $0.13 per share was approved for payment on November 15, 2022.
- Management reported no material pending legal proceedings, no material subsequent events requiring disclosure, and effective disclosure controls as of September 30, 2022.
Investor Verification Items
- Verify the sustainability of loan growth and whether the increase in nonaccrual loans and non-performing assets leads to higher provisions or charge-offs.
- Assess the effect of higher interest rates on net interest margin, deposit pricing, securities valuations, accumulated other comprehensive income, and regulatory capital.
- Review the size and timing of the CECL adoption adjustment expected in the first quarter of 2023.
- Monitor mortgage production, gain-on-sale margins, adjustable-rate mortgage retention, and the expected fourth-quarter decline in advisory fees.
- Evaluate concentration risk from commercial real estate loans and the Company’s ability to retain deposits, particularly uninsured deposits.
- Confirm future liquidity needs against $164.6 million of unused lending commitments and available borrowing capacity, including $60.0 million of unused correspondent lines, Federal Reserve Discount Window capacity, and FHLB borrowing availability.