Business Context and Reporting Period
First Community Corporation, the parent of First Community Bank, filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company operates commercial and retail banking, mortgage banking, investment advisory and non-deposit businesses. The filing was signed November 9, 2023, with 7,599,415 common shares outstanding at that date.
Financial Highlights
| Metric | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 |
|---|---|---|---|---|
| Net interest income | $12.1 million | $12.8 million | $36.6 million | $34.6 million |
| Net interest margin | 2.95% | 3.26% | 3.04% | 3.01% |
| Provision/(release) for credit losses | $474,000 | $18,000 | $730,000 | $(177,000) |
| Non-interest income | $1.9 million | $2.7 million | $7.5 million | $9.1 million |
| Non-interest expense | $11.3 million | $10.4 million | $32.5 million | $30.6 million |
| Net income | $1.8 million | $4.0 million | $8.5 million | $10.6 million |
| Diluted earnings per share | $0.23 | $0.52 | $1.12 | $1.39 |
- Third-quarter net income declined 55.5%, while nine-month net income declined 19.1% versus the comparable periods.
- Third-quarter net interest income declined 5.4% because funding costs increased faster than asset yields. Nine-month net interest income increased 5.8% due to asset growth and a modest margin increase.
- Third-quarter non-interest income included a $1.249 million loss on the sale of securities. Mortgage banking income increased to $508,000 from $290,000, and investment advisory and non-deposit commissions increased to $1.187 million from $1.053 million.
- Non-interest expense increased 8.2% in the third quarter and 6.2% for the nine-month period, driven primarily by salaries, marketing, FDIC assessments, technology and fraud-related costs.
Balance Sheet, Liquidity and Capital
| Metric | September 30, 2023 | December 31, 2022 |
|---|---|---|
| Total assets | $1.794 billion | $1.673 billion |
| Loans held for investment | $1.092 billion | $980.9 million |
| Net loans | $1.080 billion | $969.5 million |
| Total deposits | $1.492 billion | $1.385 billion |
| Shareholders’ equity | $123.6 million | $118.4 million |
| Cash and cash equivalents | $97.5 million | $37.4 million |
| FHLB advances | $80.0 million | $50.0 million |
| Securities sold under repurchase agreements | $67.2 million | $68.7 million |
- Assets increased 7.2%, loans increased 11.4%, and deposits increased 7.7% from year-end 2022. The loan-to-deposit ratio was 73.53% at September 30, 2023.
- The company issued $48.2 million of brokered certificates of deposit during the third quarter; brokered deposits represented 3.2% of total deposits at period-end.
- Remaining borrowing availability exceeded $450.1 million, including more than $355.1 million under the FHLB facility, subject to collateral requirements. Management stated that liquidity should be adequate for operations for at least the next 12 months.
- Total uninsured deposits were $429.7 million, including $85.7 million of collateralized public funds. Uninsured deposits excluding collateralized public funds were $344.0 million, or 23.1% of total deposits.
- The Bank remained well capitalized. At September 30, 2023, the leverage ratio was 8.63%, the Common Equity Tier 1 and Tier 1 capital ratios were each 12.47%, and the total capital ratio was 13.50%.
- Cash flow from operating activities was $3.7 million for the first nine months, compared with $17.8 million in the prior-year period. Investing activities used $54.4 million, while financing activities provided $110.8 million, resulting in a $60.1 million increase in cash.
Material Changes and Unusual Items
- The company sold $39.9 million of book-value U.S. Treasury securities, recognizing a $1.2 million pretax loss. Management stated that the sale increased liquidity, supported loan growth and repayment of borrowings, and was expected to have a 1.6-year earnings payback period.
- The company entered into a $150.0 million pay-fixed, receive-floating SOFR interest-rate swap on May 5, 2023. The swap matures May 5, 2026, carries a fixed rate of 3.58%, and contributed $626,000 to third-quarter loan interest and $962,000 to nine-month loan interest.
- Accumulated other comprehensive loss increased to $33.1 million from $32.4 million at year-end, primarily reflecting unrealized investment-security losses caused by higher interest rates. Available-for-sale securities had $27.4 million of unrealized losses at September 30, 2023; management recorded no related credit-loss allowance.
- Non-performing assets declined to $730,000, or 0.04% of assets, from $5.9 million, or 0.35%, at December 31, 2022. Non-accrual loans declined to $61,000 from $4.9 million.
- The allowance for credit losses on loans was $11.8 million, or 1.08% of loans, at September 30, 2023. The combined allowance for loans, unfunded commitments and held-to-maturity investments was approximately $12.5 million.
- The company adopted CECL on January 1, 2023, reducing retained earnings by $337,000 after tax. The adoption also established allowances for unfunded commitments and held-to-maturity securities.
- Management reported an extraordinary spike in mail-check fraud during the third quarter. Debit card and fraud losses increased to $277,000 from $30,000 in the prior-year quarter; management stated that reported case volumes appeared to be abating and that additional countermeasures had been implemented.
Guidance, Outlook and Risks
The filing does not provide formal earnings or revenue guidance. Management expects fourth-quarter marketing and public-relations expense to be lower than in the third quarter and anticipates remaining well capitalized for at least the next 12 months. Management also stated that liquidity and capital should support near-term operations and future loan growth.
- Primary risks include rising deposit and wholesale funding costs, pressure on net interest margin, deposit outflows, reliance on brokered deposits, and changes in access to funding.
- The loan portfolio is concentrated in real estate; approximately 91.5% of loans were real-estate collateralized. Non-owner-occupied commercial real estate loans and construction and land-development loans were approximately 310% and 82%, respectively, of bank risk-based capital.
- Credit risk could increase from declining real estate values, higher interest rates, unemployment, loan growth and the limited seasoning of portions of the portfolio. Regulators could require higher allowances or asset write-downs.
- Interest-rate modeling indicated that a parallel 400-basis-point increase could reduce first-year net interest income by 13.16% and present value of equity by 5.48%, based on the company’s assumptions.
- Other risks include higher FDIC assessments, cybersecurity incidents, fraud, regulatory changes, economic weakness, severe weather, geopolitical events and changes in accounting standards.
- Management reported no material pending legal proceedings, no required subsequent-event disclosures, and effective disclosure controls as of September 30, 2023.
Investor Verification Priorities
- Verify whether deposit growth and the $48.2 million of brokered deposits are sustainable without materially increasing funding costs.
- Monitor quarterly net interest margin, deposit pricing, FHLB borrowing balances and the company’s liability sensitivity to higher rates.
- Review commercial real estate and construction concentrations, portfolio seasoning, collateral values and CECL assumptions.
- Assess whether the significant reduction in non-accrual loans and non-performing assets remains durable.
- Determine whether the securities sale and interest-rate swap produce the expected earnings benefits after the one-time securities loss.
- Track fraud losses, FDIC assessments, operating expenses and mortgage production, which materially affected comparable-period earnings.
- Confirm future capital ratios, dividend capacity and the status of the share-repurchase plan, which expires December 31, 2023 and had no repurchases through the quarter.