First Community Corporation 2023 Form 10-K Summary
Business context and reporting period
First Community Corporation is a South Carolina bank holding company for First Community Bank, serving small-to-medium-sized businesses, professionals and individuals through 22 full-service offices in South Carolina and Georgia. The filing covers the fiscal year ended December 31, 2023, with comparisons to 2022 and 2021; it is an annual filing rather than a standalone quarterly Q4 filing.
- December 31, 2023 assets were approximately $1.83 billion, loans were $1.13 billion, deposits were $1.51 billion and shareholders’ equity was $131.1 million.
- The Bank was deemed well capitalized at year-end 2023.
- The Company operated 22 full-service offices and planned to close one downtown Augusta, Georgia office on June 27, 2024.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net interest income | $48.9 million | $47.9 million | +2.0% |
| Provision for credit losses | $1.1 million | $(0.2) million release | Higher expense |
| Non-interest income | $10.4 million | $11.6 million | -$1.1 million |
| Non-interest expense | $43.1 million | $41.3 million | +$1.9 million |
| Net income | $11.8 million | $14.6 million | -19.0% |
| Diluted EPS | $1.55 | $1.92 | Declined |
| Net interest margin, tax equivalent | 3.01% | 3.14% | -13 basis points |
| Return on average assets | 0.68% | 0.88% | Declined |
| Return on average common equity | 9.59% | 11.99% | Declined |
| Efficiency ratio | 71.23% | 68.60% | Higher is less favorable |
Net interest income increased as average earning assets grew by $90.7 million and average loans increased 13.9% to approximately $1.05 billion. The benefit of higher asset yields was more than offset by substantially higher funding costs. Interest expense increased to $23.8 million from $3.2 million, while the cost of deposits increased to 1.16% from 0.13%.
Loan growth was concentrated in commercial real estate. Commercial mortgage loans increased to $791.9 million from $709.2 million, and total loans increased 15.6% from year-end 2022. Non-interest income declined primarily because mortgage banking income fell to $1.4 million and the Company recorded a $1.2 million loss on the sale of securities. Non-interest expense increased, including higher salaries, technology costs, FDIC assessments and fraud losses.
Balance sheet, credit quality, liquidity and capital
- Total assets increased 9.2% to $1.83 billion, driven primarily by $153.2 million of loan growth.
- Total deposits increased 9.1% to $1.51 billion. Brokered deposits were $48.1 million, or 3.2% of deposits, compared with none at year-end 2022.
- The loan-to-deposit ratio increased to 75.3% from 70.9%.
- FHLB advances increased to $90.0 million from $50.0 million. Securities sold under agreements to repurchase were $62.9 million, and junior subordinated debt was $15.0 million.
- Cash and cash equivalents increased to $94.7 million from $37.4 million.
- Management reported combined remaining borrowing availability exceeding $453.9 million, subject to collateral requirements, compared with $353.8 million of uninsured deposits excluding collateralized public funds.
- The allowance for credit losses on loans was $12.3 million, or 1.08% of loans, and total credit-loss allowances, including unfunded commitments and held-to-maturity securities, were approximately $12.9 million.
- Non-performing assets declined to $864 thousand, or 0.05% of total assets, from $5.8 million, or 0.35%. Non-accrual loans declined to $27 thousand from $4.9 million.
- Net loan recoveries were approximately $6 thousand, compared with net recoveries of $309 thousand in 2022.
- Year-end Bank capital ratios were 12.5% Tier 1 risk-based capital, 13.6% total risk-based capital, 12.5% CET1 and 8.5% Tier 1 leverage. These exceeded applicable minimums and capital conservation requirements.
Material changes versus the prior comparable period
- Profitability weakened: net income declined by $2.8 million, primarily from lower non-interest income, higher operating expenses and higher credit-loss provisions.
- Balance-sheet growth accelerated, particularly in commercial real estate, while deposit growth lagged loan growth and required greater use of FHLB advances and brokered certificates of deposit.
- Net interest margin compressed because funding costs rose faster than earning-asset yields.
- Asset quality improved substantially following resolution or payoff of several non-accrual relationships, including a $3.9 million loan relationship resolved through foreclosure and subsequent sale at a $105 thousand gain.
- The Company adopted CECL on January 1, 2023. The adoption reduced retained earnings by approximately $337 thousand and established allowances for loans, held-to-maturity securities and unfunded commitments.
- The Company entered into a $150 million pay-fixed, receive-floating interest-rate swap effective May 5, 2023. The swap contributed approximately $1.6 million to loan interest income during 2023 and matures in 2026.
- The available-for-sale securities portfolio declined after the sale of $39.9 million of U.S. Treasuries, generating a $1.2 million pre-tax loss but improving liquidity and allowing borrowings to be reduced or loan growth to be funded.
- Accumulated other comprehensive loss improved by approximately $4.2 million, while year-end equity increased 10.7% to $131.1 million.
Outlook, management commentary, risks and unusual items
Management expects stable deposits, retained earnings and access to borrowing facilities to fund operations for at least the next 12 months. The filing does not provide formal earnings or revenue guidance. Management expects the effective tax rate to be approximately 21.75% to 22.25%, assuming current tax rates and the existing mix of tax-exempt securities and bank-owned life insurance remain substantially unchanged.
- Commercial real estate concentration: Commercial real estate and commercial construction loans totaled approximately $889.8 million, or 78.5% of total loans. Non-owner-occupied commercial real estate loans were approximately 313% of total risk-based capital, exceeding the regulatory supervisory indicator of 300%, although three-year growth was 47%, below the related 50% indicator.
- Interest-rate risk: Management’s model indicated that a parallel 100-basis-point increase in rates could reduce next-12-month net interest income by 2.47%; a 400-basis-point increase could reduce it by 12.24%. The Bank was primarily liability-sensitive for net interest income.
- Liquidity and funding: Deposit outflows, higher deposit pricing, reliance on brokered deposits and increased wholesale borrowings could raise funding costs or limit liquidity.
- Securities portfolio: The Company held $217.2 million of held-to-maturity securities and $282.2 million of available-for-sale securities. Unrealized losses remained material, although management concluded the securities were not credit-impaired and expected to hold them until maturity or recovery.
- Fraud: Mail-check fraud losses increased during the third quarter of 2023 after an unusual spike in reported incidents. Management stated that reported case volumes had subsequently abated and implemented additional controls and customer education.
- Regulatory and economic risk: Credit losses could increase if real estate values, employment, borrower cash flows or economic conditions deteriorate. Interest-rate changes, inflation, higher FDIC assessments, regulatory capital requirements and banking-sector liquidity stress may pressure earnings.
- Cybersecurity: The Company reported that cybersecurity threats had not materially affected it through the filing date, but identified cyberattacks, vendor risk, fraud and system disruptions as significant ongoing risks.
- Legal matters: The Company stated that litigation in the ordinary course was not expected to have a material effect. No material subsequent events requiring accrual or disclosure were identified through the financial statement issuance date.
Most important facts for investors to verify
- Whether commercial real estate concentration and loan growth remain manageable as interest rates, property values and occupancy conditions change.
- Whether the 2023 improvement in non-performing assets persists and whether CECL reserves adequately reflect future credit losses.
- Deposit stability, the proportion and cost of brokered deposits, upcoming certificate-of-deposit maturities and reliance on FHLB advances.
- Future net interest margin performance, deposit betas and the actual effect of the $150 million interest-rate swap.
- The market value and liquidity implications of unrealized losses in the available-for-sale and held-to-maturity securities portfolios.
- Whether mortgage banking income, investment advisory assets and fee income offset pressure from higher operating expenses.
- Future dividend capacity, given regulatory restrictions, capital needs and the Bank’s role as the Company’s primary source of cash.