First Community Corporation 10-Q Summary
Business Context and Reporting Period
First Community Corporation is the holding company for First Community Bank, a South Carolina-chartered community bank. The filing covers the unaudited quarter and nine months ended September 30, 2021, compared with the same periods in 2020 and with December 31, 2020 for balance-sheet items. The company provides commercial and retail banking, mortgage banking, investment advisory and non-deposit services.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net interest income | $12.5 million | $10.2 million | $34.1 million | $29.3 million |
| Provision for loan losses | $49 thousand | $1.1 million | $394 thousand | $3.4 million |
| Non-interest income | $3.6 million | $3.9 million | $10.3 million | $10.2 million |
| Non-interest expense | $9.9 million | $9.7 million | $29.3 million | $27.9 million |
| Net income | $4.7 million | $2.7 million | $11.5 million | $6.7 million |
| Diluted EPS | $0.63 | $0.35 | $1.53 | $0.89 |
| Net interest margin | 3.43% | 3.24% | 3.27% | 3.36% |
At September 30, 2021, total assets were $1.56 billion, up from $1.40 billion at December 31, 2020. Loans held for investment were $881.5 million, net loans were $870.5 million, and available-for-sale securities were $513.5 million. Deposits were $1.33 billion, up from $1.19 billion, while shareholders’ equity was $139.1 million. Securities sold under repurchase agreements were $59.8 million, junior subordinated debt was $15.0 million, and the filing reports no FHLB advances outstanding at period-end.
- Cash and cash equivalents ended at $79.7 million, compared with $123.5 million at September 30, 2020.
- Nine-month operating cash flow was $53.9 million, compared with cash used in operations of $16.0 million in the prior-year period.
- Investing activities used $200.2 million, primarily for purchases of available-for-sale securities and loan growth.
- Financing activities provided $161.0 million, mainly from $144.2 million of deposit growth and $18.9 million of increased repurchase agreements.
- The allowance for loan losses was $11.0 million, or 1.25% of total loans, compared with $10.4 million, or 1.23%, at December 31, 2020.
- The Bank remained well capitalized: leverage ratio 8.56%, Common Equity Tier 1 ratio 13.58%, Tier 1 ratio 13.58%, and total capital ratio 14.74%.
Material Changes Versus Comparable Periods
- Nine-month net income increased $4.9 million, or approximately 73%, primarily from higher net interest income and materially lower loan-loss provision expense.
- Net interest income increased 16.3% for the nine-month period as average earning assets grew $229.1 million, although the nine-month net interest margin declined nine basis points because excess liquidity was invested in lower-yielding assets and market rates remained low.
- Third-quarter net income increased approximately 79% year over year. Net interest income rose 22.4%, and the provision for loan losses declined by approximately $1.0 million.
- Nine-month non-interest income was broadly stable. Investment advisory fees and non-deposit commissions increased $897 thousand, while mortgage banking income declined $677 thousand and deposit service charges declined $136 thousand.
- Mortgage production fell to $108.6 million for the first nine months from $146.0 million in the prior-year period, but the gain-on-sale margin improved to 3.02% from 2.71%.
- Assets under management increased to $588.6 million from $436.0 million at September 30, 2020 and $501.6 million at December 31, 2020.
- Loans held for investment increased $37.4 million from year-end, driven by non-PPP loan growth of $70.5 million. PPP loans declined to $9.1 million from $42.2 million.
- Asset quality improved: nonaccrual loans declined to $359 thousand from $4.6 million at year-end; non-performing assets declined to $1.5 million from $7.0 million; and the non-performing asset ratio declined to 0.10% from 0.50%.
- Accumulated other comprehensive income declined $6.7 million, primarily because higher longer-term interest rates reduced unrealized gains on the securities portfolio.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management indicated that future mortgage gain-on-sale margins are expected to be approximately 3.25%.
- Management expects to remain well capitalized and believes liquidity is ample for customer needs and operations for at least the next 12 months. Available resources include 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, subject to collateral requirements.
- COVID-19 remains a principal uncertainty, including effects on borrowers, collateral values, loan demand, employment, inflation, supply chains and interest rates. Loans with payment deferrals declined to $4.1 million at September 30, 2021, consisting of one events/meeting-center loan with principal deferral.
- COVID-sensitive loan exposures included hotels of $34.7 million, restaurants of $22.6 million, assisted living of $8.4 million and retail of $90.2 million.
- Approximately 89.9% of the loan portfolio was collateralized by real estate, creating sensitivity to real-estate values and local economic conditions.
- PPP-related income was significant: nine-month PPP interest income was $3.1 million, including $2.7 million of deferred-fee accretion associated with loan forgiveness. The remaining net PPP deferred fees were approximately $0.3 million at period-end.
- The company recognized a $140 thousand interest recovery on a resolved nonaccrual loan during the third quarter. Prior-year results included $311 thousand of non-recurring BOLI income, which did not recur in 2021.
- Interest-rate risk could affect earnings and securities valuations. Management’s model estimated that a simultaneous 200-basis-point increase in rates would reduce next-12-month net interest income by 4.72%, while a 200-basis-point decrease would reduce it by 9.18%.
- The company expects to adopt the current expected credit loss model on January 1, 2023 and is evaluating the impact.
- No material pending legal proceedings, subsequent events requiring disclosure, or material changes in internal control were reported.
Investor Verification Items
- Verify whether declining PPP balances and related fee accretion materially affect future net interest income and margins.
- Monitor the sustainability of credit-quality improvements, including the $359 thousand of nonaccrual loans and $1.5 million of non-performing assets.
- Assess exposure to commercial real estate and COVID-sensitive industries, particularly retail, hotels and restaurants.
- Evaluate the effect of rising rates on the securities portfolio, accumulated other comprehensive income, liquidity and net interest income.
- Track mortgage production, gain-on-sale margins and investment advisory assets under management as key non-interest revenue drivers.
- Review the adequacy of the $11.0 million allowance for loan losses and the potential effect of CECL adoption in 2023.
- Confirm regulatory capital levels, dividend capacity and any future use of the authorization to repurchase up to 375,000 common shares; no repurchases occurred through September 30, 2021.