First Community Corporation: 2022 Q2 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company operating through First Community Bank. The filing covers the quarter and six months ended June 30, 2022, compared primarily with the periods ended June 30, 2021 and the balance sheet date of December 31, 2021. The filing was signed August 10, 2022. Amounts are in thousands except per-share data unless otherwise stated.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Net interest income | $11,051 | $11,092 | $21,784 | $21,659 |
| Net interest margin | 2.90% | 3.17% | 2.89% | 3.18% |
| Non-interest income | $3,009 | $3,418 | $6,383 | $6,714 |
| Non-interest expense | $10,188 | $9,878 | $20,142 | $19,418 |
| Net income | $3,130 | $3,543 | $6,619 | $6,798 |
| Diluted EPS | $0.41 | $0.47 | $0.87 | $0.90 |
- Interest income was $22.7 million for the six months, while interest expense declined to $924 thousand from $1.2 million.
- The six-month provision for loan losses was a $195 thousand release, compared with a $345 thousand provision in 2021. The allowance for loan losses was $11.2 million, or 1.22% of loans, at June 30, 2022.
- Total assets increased to $1.685 billion from $1.585 billion at December 31, 2021. Loans held for investment increased to $916.3 million from $863.7 million, while net loans were $905.1 million after the allowance.
- Total deposits increased to $1.469 billion from $1.361 billion. Securities sold under repurchase agreements increased to $71.8 million from $54.2 million.
- Junior subordinated debt remained $15.0 million; the filing also reports $71.8 million of repurchase-agreement funding. No brokered or listing-service deposits were held.
- Cash and cash equivalents were $104.4 million at June 30, 2022, versus $69.0 million at December 31, 2021. The Bank had unused federal funds purchased lines totaling $60.0 million, a $10.0 million Federal Reserve Discount Window line, and an FHLB line of credit of up to 25% of Bank assets.
- Operating cash flow was $8.7 million, investing cash flow was negative $98.4 million, and financing cash flow was $125.1 million for the six months. Ending cash increased by $35.4 million.
- Book shareholders’ equity declined to $117.6 million from $141.0 million, primarily because accumulated other comprehensive income declined by $29.8 million as interest rates increased. Equity was 7.0% of assets at June 30, 2022, compared with 8.9% at year-end.
- The Bank remained well capitalized, with a 13.47% Common Equity Tier 1 ratio, 13.47% Tier 1 ratio, 14.57% total capital ratio, and 8.34% leverage ratio at June 30, 2022.
Material changes versus comparable periods
- Six-month net income declined $179 thousand, or approximately 2.6%, primarily because non-interest income decreased $331 thousand and non-interest expense increased $724 thousand. These effects were partly offset by higher net interest income, the loan-loss release, and lower tax expense.
- Second-quarter net income declined $413 thousand, or approximately 11.7%, driven by a $409 thousand decrease in non-interest income and a $310 thousand increase in non-interest expense.
- Net interest income increased modestly for the six months despite a 29-basis-point decline in net interest margin. Average earning assets increased 11.0% to approximately $1.5 billion, but yields on loans and securities declined.
- Mortgage banking income declined to $1.3 million for the six months from $2.1 million and to $481 thousand for the quarter from $1.1 million. Mortgage production fell to $51.0 million for the six months from $76.4 million, reflecting higher rates and limited housing inventory.
- Investment advisory fees increased to $2.4 million for the six months from $1.8 million, although assets under management declined to $524.3 million from $650.9 million at December 31, 2021 and $577.5 million at June 30, 2021.
- Loans grew $52.6 million from year-end, primarily from non-PPP loans. PPP loans declined to approximately $269 thousand from $1.5 million, and 1,414 PPP loans totaling $88.2 million had been forgiven by June 30, 2022.
- On June 1, 2022, the Company transferred approximately $224.5 million of securities from available-for-sale to held-to-maturity. Held-to-maturity securities totaled $233.7 million at quarter-end. The transfer did not produce a gain or loss but left an approximately $13.1 million after-tax unrealized loss in accumulated other comprehensive loss.
- Non-performing assets increased to $5.3 million, or 0.32% of assets, from $1.4 million, or 0.09%, at year-end. Non-accrual loans increased to $4.4 million, primarily because one $4.1 million loan was placed on non-accrual status in June. No loans were more than 90 days past due and still accruing.
Outlook, commentary, risks and unusual items
- Management did not provide formal earnings or revenue guidance. It expects investment advisory fees to decline in the third quarter because those fees trail changes in assets under management.
- Management began offering 5/1, 7/1 and 10/1 adjustable-rate mortgage products for its investment portfolio to address higher-rate mortgage market conditions. This may support loan growth but reduces mortgage banking gain-on-sale income.
- The Federal Reserve raised the federal funds target range to 1.50%–1.75% by June 30, 2022. Management states the Company is asset sensitive and models higher net interest income in a rising-rate environment, although rising rates have reduced securities values and shareholders’ equity.
- COVID-19 effects, inflation, supply-chain disruptions, labor shortages, the war in Ukraine, higher interest rates, and recession risk may affect borrowers, credit quality, deposit flows, securities valuations, mortgage production, and operating expenses. Loan deferrals were zero at June 30, 2022.
- Approximately 90.7% of the loan portfolio was secured by real estate. Management identifies real-estate values, concentration risk, loan growth, delinquency trends, and allowance adequacy as important credit risks.
- 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. The magnitude and broader impact were not yet reasonably determinable and could be material.
- The Company recorded a $45 thousand loss on the sale of one other real estate owned property, a $19 thousand OREO write-down, and identified an isolated fraud-related expense increase. A $153 thousand non-recurring reduction in income tax expense lowered the six-month effective tax rate to 19.5%.
- The Board authorized a quarterly dividend of $0.13 per share, payable August 16, 2022. A new authorization permits repurchases of up to 375,000 shares through December 31, 2023; no repurchases had been made through June 30, 2022.
- Management reported no material pending legal proceedings, no subsequent events requiring disclosure, and effective disclosure controls as of June 30, 2022.
Investor verification items
- Verify the sustainability of loan growth, the increase in non-accrual loans, and the adequacy of the $11.2 million allowance before CECL adoption.
- Assess exposure to commercial real estate and the effect of changing property values, interest rates, unemployment, and recession conditions.
- Reconcile the securities transfer, accumulated other comprehensive loss, and the significant unrealized losses in the available-for-sale and held-to-maturity portfolios.
- Monitor whether deposit growth and available borrowing capacity remain sufficient if uninsured deposits or other funding sources decline.
- Evaluate the effect of further rate increases on net interest margin, securities valuations, mortgage production, and investment advisory assets under management.
- Confirm the magnitude of the eventual CECL transition adjustment and any associated regulatory-capital effects.
- Review the filing’s fair-value disclosures carefully: the source text contains an apparent inconsistency in one table showing available-for-sale fair value of $377.254 million, while the balance sheet and other securities schedules show $337.254 million.