First Community Corporation 10-Q Summary
Business Context and Reporting Period
First Community Corporation, the parent of First Community Bank, is a South Carolina community banking company providing commercial and retail banking, mortgage banking, investment advisory, and non-deposit services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The filing was signed November 6, 2020.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net interest income | $10.2 million vs. $9.4 million | $29.3 million vs. $27.5 million |
| Provision for loan losses | $1.1 million vs. $25 thousand | $3.4 million vs. $139 thousand |
| Non-interest income | $3.9 million vs. $3.1 million | $10.2 million vs. $8.8 million |
| Non-interest expense | $9.7 million vs. $8.8 million | $27.9 million vs. $25.8 million |
| Net income | $2.7 million vs. $2.9 million | $6.7 million vs. $8.3 million |
| Diluted EPS | $0.35 vs. $0.39 | $0.89 vs. $1.08 |
| Net interest margin | 3.24% vs. 3.63% | 3.36% vs. 3.65% |
Amounts in the table are in millions except per-share amounts. The filing reports dollars in thousands in the financial statements.
- Total assets were $1.382 billion at September 30, 2020, up from $1.170 billion at December 31, 2019.
- Gross loans were $844.5 million, up 14.6% from $737.0 million. Net loans were $834.3 million after a $10.1 million allowance for loan losses.
- Deposits were $1.174 billion, up 18.8% from $988.2 million. Securities sold under repurchase agreements were $47.1 million; Federal Home Loan Bank advances were zero.
- Cash and cash equivalents were $123.5 million at September 30, 2020, compared with $47.7 million at December 31, 2019.
- Nine-month operating cash flow was negative $15.8 million, investing cash flow was negative $105.2 million, and financing cash flow was positive $196.8 million, producing a $75.8 million increase in cash.
- Shareholders’ equity was $133.2 million, up 10.8% from $120.2 million, primarily due to earnings retention and an $8.4 million increase in accumulated other comprehensive income.
- The Bank’s September 30 regulatory ratios were 8.95% leverage, 12.96% Common Equity Tier 1, 12.96% Tier 1, and 14.08% total capital, all above well-capitalized thresholds.
Material Changes Versus Prior Comparable Period
- Nine-month net income declined $1.6 million, or approximately 19%, primarily because the provision for loan losses increased $3.2 million and non-interest expense increased $2.1 million. These effects were partly offset by higher net interest and non-interest income and lower taxes.
- Net interest income increased 6.7% for the nine-month period and 8.8% for the quarter, but net interest margin declined 29 basis points and 39 basis points, respectively, due to lower market rates, lower PPP loan yields, and excess liquidity invested in lower-yielding assets.
- Average earning assets increased 15.8% for the nine-month period and 22.1% for the quarter. Average loans increased 11.6% and 17.3%, respectively.
- Non-interest income benefited from higher mortgage banking income and investment advisory fees. Mortgage production was $146.0 million for the first nine months and $56.8 million in the third quarter.
- The allowance for loan losses increased from $6.6 million at December 31, 2019 to $10.1 million at September 30, 2020, or 1.20% of total loans versus 0.90%. The increase primarily reflected higher qualitative factors for COVID-19-related economic deterioration and uncertainty.
- Non-performing assets declined to $3.0 million, or 0.22% of total assets, from $3.7 million, or 0.32%, at December 31, 2019. Net loan recoveries were $99 thousand for the first nine months.
Guidance, Outlook, Risks, and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expects the Bank to remain well capitalized for at least the next 12 months and throughout the COVID-19 pandemic, subject to potential future credit losses.
- Management states that liquidity is ample, supported by low-cost deposits, $60.0 million of federal funds purchased lines, a $10.0 million Federal Reserve Discount Window line, and FHLB borrowing capacity of up to 25% of Bank assets. These borrowing lines were not utilized at September 30, 2020.
- COVID-19 created substantial uncertainty regarding borrower repayment capacity, collateral values, loan demand, deposit activity, margins, credit losses, and economic recovery. Payment deferrals declined to $27.3 million at September 30, 2020 from a peak of $206.9 million during the second quarter.
- The Bank had 843 PPP loans totaling $51.2 million gross, or $49.8 million net of deferred fees and costs. No PPP loans had received forgiveness by September 30, 2020; management expected forgiveness activity to accelerate in the fourth quarter of 2020 and the first half of 2021.
- COVID-19-sensitive loan exposures included retail of $79.8 million, hotels of $30.3 million, restaurants of $22.6 million, and assisted living of $8.8 million.
- A $311 thousand non-recurring BOLI benefit was recognized in the third quarter following insurance benefits related to two former directors of acquired banks. A $147 thousand gain on sale of other assets, primarily OREO, was recorded for the nine-month period.
- The Company reported no other-than-temporary impairment of investment securities and no goodwill impairment as of September 30, 2020, but stated that future market and economic deterioration could require impairment charges.
- Unused lending commitments were $122.0 million, including $41.3 million of unused home-equity lines. The filing states that no material legal proceedings were pending and no subsequent events requiring disclosure had occurred.
- CECL adoption is scheduled for January 1, 2023. Management expects the standard could materially increase the allowance for loan losses, but the amount of any adjustment was not yet determinable.
Important Facts for Investors to Verify
- Whether the remaining COVID-19 payment deferrals and exposure to retail, hotels, restaurants, and assisted living translate into higher non-performing loans, charge-offs, or provisions.
- The timing and economic impact of PPP loan forgiveness, including recognition of the $1.4 million of net deferred PPP fees.
- Whether net interest margin continues to contract in the low-rate environment and whether deposit growth can offset asset-yield pressure.
- The adequacy of the $10.1 million allowance for loan losses and the potential effect of future COVID-19 losses and CECL adoption.
- The sustainability of mortgage banking and investment advisory revenue, including mortgage gain-on-sale margins that declined during 2020.
- The ability to maintain well-capitalized ratios, liquidity, and dividend payments if credit conditions deteriorate.