First Community Corporation 2020 Form 10-K Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company operating First Community Bank, a community and commercial bank serving South Carolina and Georgia through 21 full-service offices. The filing covers the fiscal year ended December 31, 2020, with unaudited fourth-quarter data also presented. The company focuses on small and medium-sized businesses, professionals and individuals, with commercial and retail banking, mortgage banking, investment advisory and non-deposit services.
At December 31, 2020, the company reported approximately $1.4 billion of assets, $844.2 million of loans, $1.2 billion of deposits and $136.3 million of shareholders’ equity. The Bank was deemed well capitalized.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net income | $10.1 million | $11.0 million | Down $872 thousand |
| Diluted EPS | $1.35 | $1.45 | Down $0.10 |
| Net interest income | $40.0 million | $36.8 million | Up 8.6% |
| Provision for loan losses | $3.7 million | $139 thousand | Up $3.5 million |
| Non-interest income | $13.8 million | $11.7 million | Up $2.0 million |
| Non-interest expense | $37.5 million | $34.6 million | Up $2.9 million |
| Net interest margin, tax equivalent | 3.37% | 3.65% | Down 28 basis points |
| Return on average assets | 0.78% | 0.98% | Down 20 basis points |
| Return on average common equity | 7.84% | 9.38% | Down 154 basis points |
| Efficiency ratio | 69.99% | 70.51% | Improved 52 basis points |
Net interest income benefited from a $180.4 million increase in average earning assets, but lower market rates, competitive loan pricing, lower PPP loan yields and excess liquidity reduced the net interest margin. Interest expense declined to $3.8 million from $5.8 million as the average cost of interest-bearing liabilities fell to 0.46% from 0.80%.
Mortgage banking income increased to $5.6 million from $4.6 million as mortgage production rose to $199.3 million from $139.7 million. Investment advisory fees and non-deposit commissions increased to $2.7 million from $2.0 million. Deposit service charges declined by $528 thousand. Non-interest income included $311 thousand of non-recurring bank-owned life insurance proceeds.
Balance sheet, asset quality and capital
- Total assets increased 19.2% to $1.395 billion from $1.170 billion.
- Loans held for investment increased 14.5% to $844.2 million. PPP loans were $42.2 million net of deferred fees and costs at year-end.
- Deposits increased 20.4% to $1.189 billion. The company reported no brokered or listing-service deposits.
- Investment securities increased to $359.9 million from $286.8 million, primarily reflecting deposit growth and PPP-related liquidity.
- Shareholders’ equity increased 13.4% to $136.3 million, including an $8.8 million increase in accumulated other comprehensive income from unrealized securities gains.
- The allowance for loan losses increased to $10.4 million, or 1.23% of loans, from $6.6 million, or 0.90%, reflecting COVID-19-related qualitative adjustments.
- Non-performing assets increased to $7.0 million, or 0.50% of assets, from $3.7 million, or 0.32%. Management attributed the increase primarily to one COVID-19-impacted credit relationship.
- Commercial real estate and commercial construction loans totaled approximately $656.6 million, or 77.8% of the loan portfolio. Commercial real estate concentration remains a significant credit risk.
- Bank regulatory capital ratios remained above well-capitalized thresholds: CET1 12.83%, Tier 1 12.83%, total risk-based capital 13.94% and leverage 8.84%.
Cash flow, debt and liquidity
- Cash and cash equivalents increased to $65.0 million from $47.7 million.
- Operating activities used $17.0 million, primarily reflecting mortgage loan originations and sales timing.
- Investing activities used $171.5 million, including $107.0 million of net loan growth and $112.0 million of investment-security purchases.
- Financing activities provided $205.9 million, principally from a $201.2 million increase in deposits.
- Year-end debt included $40.9 million of securities sold under repurchase agreements and $15.0 million of junior subordinated debt; there were no FHLB advances outstanding.
- The Bank maintained $60.0 million of federal funds purchased lines and a $10.0 million Federal Reserve Discount Window line. The FHLB of Atlanta had approved borrowing capacity of up to 25% of Bank assets, subject to collateral.
- Unused commitments to extend credit totaled $142.6 million, including $42.3 million of unused home-equity lines.
Fourth-quarter 2020 results
| Metric | Q4 2020 | Q4 2019 |
|---|---|---|
| Net interest income | $10.7 million | $9.4 million |
| Provision for loan losses | $276 thousand | None reported |
| Income before taxes | $4.4 million | $3.4 million |
| Net income | $3.4 million | $2.7 million |
| Diluted EPS | $0.46 | $0.36 |
Material changes, outlook and risks
- COVID-19 materially affected economic activity, interest rates, loan-loss provisioning, deposit-service fees, operating expenses and credit risk. Payment deferrals peaked at $206.9 million during the second quarter and declined to $16.1 million at December 31, 2020.
- Management stated that liquidity was ample and expected capital and retained earnings to fund operations for at least the next 12 months. Management also expected the Bank to remain well capitalized, while acknowledging that additional pandemic-related credit losses could reduce capital ratios.
- The company participated in the Paycheck Protection Program and had $43.3 million of gross PPP loans outstanding at year-end. PPP fees are recognized as interest income over the remaining loan lives.
- Management provided no formal earnings or revenue guidance. The filing states that future results remain dependent on the duration and severity of COVID-19, vaccine effectiveness and distribution, borrower performance and economic recovery.
- Key risks include commercial real estate concentration, higher future loan losses, interest-rate and margin pressure, deposit outflows, regulatory capital requirements, cybersecurity and vendor risks, competition, litigation and regulatory change.
- CECL is scheduled to become effective for the company on January 1, 2023. Management expects a possible one-time increase in the allowance for credit losses but had not determined the amount.
- The company had $20.6 million of LIBOR-based loans, $71.3 million of LIBOR-indexed securities and $15.0 million of junior subordinated debt indexed to LIBOR at year-end. New loans and renewals with maturities over one year generally use alternative indices.
- The company paid quarterly dividends of $0.12 per share in 2020, or $0.48 for the year. Future dividends remain subject to board approval, regulatory restrictions and the Bank’s ability to upstream dividends.
Important facts for investors to verify
- Whether COVID-19-related deferrals convert into delinquencies, non-performing loans, charge-offs or additional provisioning after year-end.
- The adequacy of the $10.4 million allowance relative to the company’s large commercial real estate and construction exposure.
- The sustainability of the 2020 increase in mortgage banking and investment advisory income, including the effect of refinancing activity and non-recurring BOLI income.
- The effect of continued low interest rates, deposit repricing and excess liquidity on net interest margin.
- The timing and financial impact of CECL adoption in 2023.
- Progress in transitioning LIBOR-linked instruments to alternative reference rates.
- Availability of liquidity facilities, collateral requirements and the company’s ability to support $142.6 million of unused credit commitments.
- Whether capital ratios remain comfortably above well-capitalized thresholds if credit losses increase or securities values decline.