First Community Corporation (Nasdaq: FCCO) — Q2 2023 Form 10-Q Summary
Business context and reporting period
First Community Corporation is the holding company for First Community Bank, a South Carolina community bank providing commercial and retail banking, mortgage banking, investment advisory, and non-deposit services. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods, and the balance sheet at June 30, 2023 compared with December 31, 2022.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net income | $3.3 million | $3.1 million | $6.8 million | $6.6 million |
| Diluted EPS | $0.43 | $0.41 | $0.89 | $0.87 |
| Net interest income | $12.1 million | $11.1 million | $24.5 million | $21.8 million |
| Net interest margin | 3.00% | 2.90% | 3.08% | 2.89% |
| Provision for credit losses | $186 thousand | $(70) thousand release | $256 thousand | $(195) thousand release |
| Non-interest income | $3.1 million | $3.0 million | $5.6 million | $6.4 million |
| Non-interest expense | $10.8 million | $10.2 million | $21.2 million | $20.1 million |
At June 30, 2023, total assets were $1.741 billion, up from $1.673 billion at year-end 2022. Loans held-for-investment were $1.032 billion, up 5.2% from $980.9 million, while net loans were $1.021 billion after a $11.6 million allowance for credit losses. Total deposits were $1.421 billion, up 2.6% from December 31, 2022. Shareholders’ equity was $124.1 million, or 7.13% of total assets.
Six-month operating cash flow was $0.7 million, compared with $8.7 million in 2022. Investing activities used $41.3 million, primarily because of loan growth, while financing activities provided $60.2 million. Cash and cash equivalents increased $19.6 million to $57.0 million.
Borrowings at June 30, 2023 included $95.0 million of Federal Home Loan Bank advances, $72.1 million of securities sold under repurchase agreements, and $15.0 million of junior subordinated debt. Federal funds purchased were zero. The Bank reported a 8.63% leverage ratio, 13.29% Common Equity Tier 1 and Tier 1 capital ratios, and a 14.35% total capital ratio, and remained well capitalized.
Material changes versus comparable periods
- Six-month net income increased $171 thousand, or approximately 2.6%, as higher net interest income more than offset lower fee income, higher expenses, higher credit-loss provisions, and higher taxes.
- Net interest income increased 12.4% for the six months and 9.8% for the quarter. Management attributed the improvement to loan growth, higher asset yields, a shift toward loans from lower-yielding securities and short-term investments, and the new interest-rate swap.
- Average loans increased 13.0% for the six months and 13.5% for the quarter. The loan-to-deposit ratio, including loans held-for-sale, was 72.94% at June 30, 2023 versus 70.93% at year-end 2022.
- Non-interest income declined 11.9% for the six months, principally because mortgage banking income fell $794 thousand and investment advisory and non-deposit commissions fell $245 thousand. Mortgage banking production sold into the secondary market declined to $18.1 million from $45.9 million.
- Non-interest expense increased 5.2% for the six months, driven mainly by salaries and benefits, occupancy, technology costs, and FDIC insurance assessments.
- Asset quality improved materially. Non-accrual loans declined to $83 thousand from $4.9 million at year-end 2022, and non-performing assets declined to $1.0 million, or 0.06% of assets, from $5.8 million, or 0.35%. The resolution of a $3.9 million loan relationship through foreclosure and sale generated a $105 thousand gain.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management expects liquidity and capital to be sufficient for at least the next 12 months and anticipates that the Bank will remain well capitalized. The Board approved a second-quarter cash dividend of $0.14 per share, payable August 15, 2023.
On May 5, 2023, the Company entered into a $150.0 million pay-fixed, receive-floating SOFR interest-rate swap maturing May 5, 2026. Management stated that the swap increased interest on loans by $336 thousand during the six months and shifted the Company to a slightly asset-sensitive interest-rate position.
The Company adopted CECL on January 1, 2023. The adoption reduced retained earnings by $337 thousand, established a $43 thousand allowance for held-to-maturity securities, and increased the allowance for unfunded commitments to $398 thousand at adoption. At June 30, 2023, total credit-loss allowances for loans, unfunded commitments, and investments totaled approximately $12.0 million.
Key risks include rising or declining interest rates, deposit outflows and higher funding costs, liquidity access, credit losses, commercial real estate and construction concentrations, declining real estate values, FDIC assessment increases, regulatory actions, cybersecurity threats, economic deterioration, and uncertainty in CECL estimates. Approximately 91.3% of the loan portfolio was collateralized by real estate, and non-owner-occupied commercial loans equaled approximately 285% of total risk-based capital.
Unusual or non-recurring second-quarter income included a $105 thousand gain on sale of other real estate owned, a $93 thousand bank-owned life insurance claim, and $28 thousand of insurance proceeds. Accumulated other comprehensive loss improved to $31.5 million from $32.4 million at year-end, but the securities portfolio still had significant unrealized losses related primarily to higher interest rates.
Management reported effective disclosure controls and no material changes in internal control over financial reporting. It also reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth, particularly commercial real estate and construction lending, remains consistent with underwriting standards and available capital.
- The sustainability of the 3.00% quarterly and 3.08% year-to-date net interest margins as deposit costs and other funding costs rise.
- The composition and stability of the $422.4 million of uninsured deposits and the Company’s reliance on $95.0 million of FHLB advances.
- The adequacy of the $11.6 million loan allowance and $429 thousand unfunded-commitment allowance under CECL, including the effect of economic forecasts and qualitative adjustments.
- The duration, unrealized losses, liquidity value, and potential capital effects of the investment securities portfolio, including $25.1 million of unrealized losses on available-for-sale securities and $13.1 million on held-to-maturity securities.
- Whether mortgage banking and investment advisory fee declines persist despite growth in assets under management to $675.4 million.
- The terms, hedge effectiveness, and earnings sensitivity of the $150.0 million interest-rate swap.
- Future FDIC assessments, deposit pricing, regulatory capital requirements, and the maturity and refinancing risk of FHLB advances due between July 2023 and December 2024.