First Community Corporation — Form 10-K Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company whose wholly owned subsidiary, First Community Bank, provides commercial and retail banking, mortgage banking, investment advisory, brokerage and insurance services across South Carolina and the Augusta, Georgia area. The filing covers the fiscal year ended December 31, 2021. The company operated 21 full-service offices and had approximately 250 employees at year-end.
At December 31, 2021, the company reported approximately $1.585 billion of assets, $863.7 million of loans held for investment, $1.361 billion of deposits and $141.0 million of shareholders’ equity.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net interest income | $45.3 million | $40.0 million | +13.1% |
| Net interest margin, tax equivalent | 3.23% | 3.37% | -14 bps |
| Non-interest income | $13.9 million | $13.8 million | +$0.1 million |
| Non-interest expense | $39.2 million | $37.5 million | +$1.7 million |
| Provision for loan losses | $0.3 million | $3.7 million | -$3.3 million |
| Net income | $15.5 million | $10.1 million | +53.1% |
| Diluted EPS | $2.05 | $1.35 | +$0.70 |
| Return on average assets | 1.02% | 0.78% | +24 bps |
| Return on average common equity | 11.22% | 7.84% | +338 bps |
| Efficiency ratio | 66.09% | 69.99% | Improved |
Net income increased primarily because higher average earning assets generated $5.3 million of additional net interest income and the provision for loan losses declined by $3.3 million. These benefits were partly offset by higher operating expenses and taxes. The effective tax rate increased to 21.27% from 19.82%.
Non-interest income was broadly stable. Investment advisory fees and non-deposit commissions rose to $4.0 million from $2.7 million, while mortgage banking income declined to $4.3 million from $5.6 million as mortgage production fell to $142.1 million from $199.3 million. Assets under management increased to $650.9 million from $501.6 million.
Balance sheet, cash flow, debt and liquidity
- Total assets increased 13.6% to $1.585 billion, primarily from deposit growth and increased investment securities.
- Loans held for investment increased 2.3% to $863.7 million. Non-PPP loans increased $60.3 million, while PPP loans declined $40.8 million to $1.5 million.
- Investment securities increased to $564.8 million from $359.9 million. The portfolio was primarily composed of mortgage-backed securities, state and local government securities and other investment-grade instruments.
- Deposits increased $171.9 million, or 14.5%, to $1.361 billion. The company reported no brokered or listing-service deposits.
- Cash and cash equivalents increased to $69.0 million from $65.0 million.
- Operating activities provided $57.9 million of cash, compared with cash used of $17.0 million in 2020. Investing activities used $236.3 million, principally for purchases of investment securities. Financing activities provided $182.4 million, primarily from deposit growth.
- Year-end debt included $54.2 million of securities sold under agreements to repurchase and $15.0 million of junior subordinated debt. There were no FHLB advances outstanding at year-end.
- Management stated that liquidity was ample and expected to support operations for at least the next 12 months. The Bank maintained $60.0 million of federal funds purchased lines, a $10.0 million Federal Reserve Discount Window line and access to an FHLB line of credit of up to 25% of assets.
- Unused commitments to extend credit totaled $137.4 million, including $42.9 million of unused home equity lines.
Asset quality, capital and dividends
- Non-performing assets declined to $1.4 million, or 0.09% of assets, from $7.0 million, or 0.50%. Non-accrual loans declined to $250 thousand from $4.6 million, and there were no loans past due more than 90 days and still accruing.
- The allowance for loan losses increased to $11.2 million, or 1.29% of loans, from $10.4 million, or 1.23%. The company recorded $455 thousand of net recoveries in 2021.
- Commercial real estate remained a significant concentration: approximately $703.3 million, or 81.4% of total loans, was secured by commercial real estate. Non-owner-occupied commercial real estate represented approximately 258% of Bank risk-based capital.
- The Bank was categorized as well capitalized. Year-end regulatory ratios were 14.0% CET1, 14.0% Tier 1 risk-based capital, 15.2% total risk-based capital and 8.5% Tier 1 leverage.
- Shareholders’ equity increased 3.4% to $141.0 million, although accumulated other comprehensive income declined $8.0 million due to lower unrealized gains on investment securities as market interest rates increased.
- The company paid quarterly dividends of $0.12 per share during 2021 and announced a $0.13 per share dividend payable in February 2022. Dividend payments remain subject to Bank profitability, capital requirements and regulatory restrictions.
- The Board authorized a repurchase plan for up to 375,000 shares, but no repurchases were made through December 31, 2021.
Fourth-quarter 2021 results
Unaudited fourth-quarter net income was $3.9 million, or $0.52 diluted EPS, compared with $3.4 million, or $0.46 diluted EPS, in the fourth quarter of 2020. Fourth-quarter net interest income was $11.2 million, and the provision for loan losses was a $59 thousand benefit. Income before taxes was $5.0 million.
Material changes versus the prior comparable period
- Profitability improved materially, with net income up $5.4 million and diluted EPS up $0.70.
- Balance-sheet liquidity expanded substantially: deposits rose $171.9 million and investment securities rose $204.9 million, while loans grew only $19.5 million.
- Net interest income increased despite a 14-basis-point decline in the tax-equivalent net interest margin, reflecting an 18.4% increase in average earning assets.
- Credit quality improved significantly as pandemic-related deferrals fell to zero at year-end from $16.1 million at December 31, 2020.
- PPP activity largely ran off: 1,406 PPP loans totaling $87.0 million had been forgiven by year-end, leaving $1.5 million outstanding.
- Mortgage production and mortgage banking income declined, while investment advisory revenue increased.
- The Bank’s regulatory capital ratios improved from 2020 levels, although the consolidated equity-to-assets ratio declined to 8.90% from 9.77% because asset growth outpaced equity growth.
Guidance, outlook, management commentary and risks
- Management expected interest rates to increase during 2022 and stated that the Bank was asset-sensitive; its modeling projected higher net interest income under rising-rate scenarios.
- Management expected an effective tax rate of approximately 21.25% to 21.75%, assuming the corporate tax rate remained unchanged.
- Management anticipated a future mortgage gain-on-sale margin of approximately 3.25%.
- The company announced plans to establish a loan production office in Rock Hill, South Carolina, subject to regulatory notice and nonobjection, with a potential full-service office thereafter.
- COVID-19 remained a material uncertainty, including risks from variants, borrower stress, supply-chain disruptions, inflation, labor shortages, collateral values and possible renewed operating restrictions.
- Commercial real estate concentration, local economic conditions, higher interest rates, credit losses and the adequacy of the allowance remain key financial risks.
- CECL becomes effective for the company on January 1, 2023. Management was implementing the model but could not estimate the magnitude of the required transition adjustment or its effect on earnings and capital.
- The company had $19.4 million of LIBOR-based loans, $64.7 million of LIBOR-indexed securities and $15.0 million of junior subordinated debt at year-end. LIBOR transition could create operational, legal, pricing and interest-rate risks.
- Other significant risks include cybersecurity and third-party vendor failures, regulatory changes, competition, litigation, FDIC assessment changes, deposit outflows and the company’s obligation to provide financial strength to the Bank.
- Management reported no pending or threatened legal proceeding expected to have a material effect, no material subsequent events requiring disclosure and effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether commercial real estate concentrations and local property values remain manageable as interest rates and operating costs increase.
- The sustainability of the 2021 earnings improvement after PPP fee accretion, unusually low credit costs and elevated deposit liquidity are reduced.
- The company’s final CECL implementation impact on the allowance, retained earnings, regulatory capital and future provision expense.
- Deposit stability, liquidity availability and the effect of higher rates on funding costs, securities valuations and net interest margin.
- Future mortgage production, gain-on-sale margins and the growth trajectory of investment advisory assets and fees.
- Whether credit losses remain below the $11.2 million allowance and whether non-performing assets remain near year-end levels.
- The terms and execution of any new share repurchase plan and the regulatory capacity to continue increasing dividends.
- Progress and regulatory approvals for the planned Rock Hill expansion.