Business Context and Reporting Period
First Community Corporation, a South Carolina bank holding company operating through First Community Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company provides commercial and retail banking, mortgage banking, investment advisory, and non-deposit services. The filing was signed August 10, 2021.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net interest income | $11.1 million, up 13.8% | $21.7 million, up 13.0% |
| Provision for loan losses | $0.2 million, versus $1.3 million | $0.3 million, versus $2.3 million |
| Non-interest income | $3.4 million, approximately flat | $6.7 million, up 6.3% |
| Non-interest expense | $9.9 million, up 8.2% | $19.4 million, up 6.9% |
| Net income | $3.5 million, versus $2.2 million | $6.8 million, versus $4.0 million |
| Diluted EPS | $0.47, versus $0.30 | $0.90, versus $0.54 |
| Net interest margin | 3.17%, versus 3.35% | 3.18%, versus 3.43% |
- Net income increased 59.8% for the quarter and 69.5% for the six-month period. The improvement primarily reflected higher net interest income and substantially lower loan-loss provisions.
- Average earning assets increased 19.9% in the quarter and 22.0% for the six-month period, but lower market rates and deployment of excess liquidity into lower-yielding securities reduced net interest margin by 18 basis points and 25 basis points, respectively.
- For the six-month period, average loans increased to $891.0 million from $789.3 million. Average PPP loans were $55.6 million, while average non-PPP loans were $835.5 million.
- Mortgage banking income declined to $2.1 million for the six-month period from $2.6 million, as mortgage production fell to $76.4 million from $89.2 million. Investment advisory and non-deposit fees increased to $1.8 million from $1.3 million; assets under management reached $577.5 million at June 30, 2021.
- Effective tax rates were 20.63% for the quarter and 21.05% for the six-month period, compared with 19.35% and 19.47%, respectively, in the prior-year periods.
- Total assets were $1.515 billion at June 30, 2021, up from $1.395 billion at December 31, 2020. Loans held for investment increased to $878.3 million from $844.2 million, while loans held for sale declined to $11.4 million from $45.0 million.
- Investment securities available for sale increased to $469.0 million from $359.9 million. The portfolio had $11.7 million of gross unrealized gains and $2.3 million of unrealized losses at quarter-end.
- Total deposits increased to $1.290 billion from $1.189 billion. Securities sold under repurchase agreements increased to $60.5 million from $40.9 million. Junior subordinated debt remained $15.0 million; the filing reports no outstanding FHLB advances at June 30, 2021.
- Cash and cash equivalents were $76.0 million at June 30, 2021, compared with $65.0 million at December 31, 2020. Six-month operating cash flow was $41.4 million, compared with a use of $12.0 million in the prior-year period. Investing cash flow was a use of $149.1 million, primarily reflecting purchases of securities and loan growth, while financing cash flow provided $118.7 million, primarily from deposit growth.
- Shareholders’ equity was $137.9 million, up 1.2% from year-end. The increase in retained earnings and stock awards was partly offset by a $3.8 million decline in accumulated other comprehensive income caused by lower unrealized gains on securities.
- The allowance for loan losses was $10.6 million, or 1.21% of loans, compared with $10.4 million, or 1.23%, at year-end. Net loan charge-offs for the six months were $96 thousand.
Material Changes Versus Comparable Periods
- Profitability improved principally because the loan-loss provision declined by $1.1 million in the quarter and $2.0 million for the six-month period. Management attributed the reduction to lower COVID-19-related qualitative allowance factors compared with 2020.
- Net interest income benefited from asset growth and lower funding costs. The cost of interest-bearing liabilities declined to 0.24% in the quarter and 0.27% for the six-month period, from 0.48% and 0.58%, respectively.
- Non-interest expense increased due to salaries and benefits, occupancy, marketing, FDIC assessments, data processing, legal costs, and expenses related to product enhancements and conversion to a new mortgage origination system.
- Credit quality indicators weakened in reported balances at quarter-end, primarily because of one $4.2 million loan that was 90 days or more past due but still accruing interest. Management stated that this loan was paid current after June 30, 2021.
- Non-performing assets increased to $9.3 million, or 0.62% of total assets, from $7.0 million, or 0.50%, at year-end. Loans past due 30 days or more increased to $4.3 million, or 0.49% of loans, from $1.9 million, or 0.23%.
- COVID-19-related payment deferrals declined sharply to $4.5 million at June 30, 2021, from $16.1 million at year-end and $175.0 million at June 30, 2020. The remaining deferrals related to two loans with principal payments deferred.
Outlook, Commentary, Risks, and Unusual Items
- Management expects continued improvement in commercial and consumer activity as restrictions ease and vaccinations become broadly available, but expects varying degrees of customer financial distress to continue into the second half of 2021.
- Management indicated that future mortgage gain-on-sale margins may be approximately 3.00% to 3.25%. No formal earnings or revenue guidance was provided.
- The company expects to remain well capitalized and reported that the Bank exceeded well-capitalized regulatory thresholds. At June 30, 2021, the Bank’s leverage ratio was 8.48%, common equity Tier 1 and Tier 1 ratios were 13.52%, and total capital ratio was 14.66%.
- Management believes liquidity is ample based on core deposits, $60.0 million of unused correspondent-bank federal funds lines, a $10 million Federal Reserve Discount Window line, and FHLB borrowing capacity of up to 25% of Bank assets, subject to collateral.
- Key risks include COVID-19 effects, PPP loan forgiveness and pricing, commercial real estate concentration, loan losses, interest-rate changes, deposit flows, liquidity access, regulatory actions, cybersecurity, economic conditions, inflation, supply-chain constraints, labor shortages, and changes in accounting standards.
- Approximately 86.4% of the loan portfolio was collateralized by real estate. COVID-19-sensitive exposures included retail of $83.0 million, hotels of $33.9 million, restaurants of $21.3 million, and assisted living of $8.7 million.
- The company recognized a $100 thousand collection related to a summary judgment on a previously charged-off loan. Second-quarter expenses also included non-recurring legal costs and one-time product enhancement and mortgage-system conversion costs.
- The Board approved a $0.12 per-share second-quarter dividend, payable August 17, 2021. A repurchase plan authorizing up to 375,000 shares was approved, but no repurchases occurred during the quarter.
- The company stated that no material legal proceedings were pending and that no subsequent events requiring accrual or disclosure had occurred.
Important Facts for Investors to Verify
- Whether the $4.2 million delinquent loan remaining current after quarter-end represents a sustainable improvement in reported asset quality.
- The adequacy of the $10.6 million allowance as COVID-19 support programs expire and the company transitions to the CECL model in 2023.
- The effect of the large investment securities portfolio and changing interest rates on net interest margin, accumulated other comprehensive income, and capital.
- The sustainability of deposit growth, excess liquidity, and the 3.17% to 3.18% net interest margin in a low-rate environment.
- Future mortgage production, gain-on-sale margins, investment advisory growth, and the impact of the new mortgage origination system.
- The potential credit impact of the company’s commercial real estate concentration and exposures to hotels, restaurants, assisted living, and retail.