Business Context and Reporting Period
First Community Corporation is the parent of 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 months ended March 31, 2023, compared primarily with the three months ended March 31, 2022 and, for balance-sheet items, December 31, 2022.
Key Financial Metrics
| Metric | Q1 2023 | Comparable period or prior date | Change |
|---|---|---|---|
| Total assets | $1.735 billion | $1.673 billion at Dec. 31, 2022 | +3.7% |
| Loans held for investment | $992.7 million | $980.9 million at Dec. 31, 2022 | +1.2% |
| Total deposits | $1.420 billion | $1.385 billion at Dec. 31, 2022 | +2.5% |
| Net interest income | $12.4 million | $10.7 million in Q1 2022 | +15.1% |
| Net interest margin | 3.17% | 2.87% in Q1 2022 | +30 basis points |
| Provision for credit losses | $70 thousand | $125 thousand release in Q1 2022 | Unfavorable swing of $195 thousand |
| Non-interest income | $2.6 million | $3.4 million in Q1 2022 | -23.7% |
| Non-interest expense | $10.4 million | $10.0 million in Q1 2022 | +4.8% |
| Net income | $3.463 million | $3.489 million in Q1 2022 | -0.7% |
| Diluted earnings per share | $0.45 | $0.46 in Q1 2022 | Down $0.01 |
| Cash flow from operating activities | $4.0 million provided | $1.6 million used in Q1 2022 | Improved by $5.6 million |
| Shareholders’ equity | $123.6 million | $118.4 million at Dec. 31, 2022 | +4.4% |
Interest income increased to $15.9 million from $11.2 million, but interest expense rose substantially to $3.5 million from $0.5 million as deposit and borrowing costs increased. The reported effective tax rate was 21.76%, compared with 18.44% in Q1 2022.
Net income was approximately 0.20% of average total assets for the quarter; the filing does not present a separately labeled return-on-assets or return-on-equity measure.
Credit Quality and Capital
- The allowance for credit losses on loans was $11.4 million, or 1.15% of total loans, at March 31, 2023.
- Non-accrual loans declined to $4.1 million from $4.9 million at year-end 2022. Non-performing assets were $5.1 million, or 0.29% of total assets.
- Net loan charge-offs were $11 thousand, and the quarter produced $15 thousand of net loan recoveries under management’s separate discussion.
- Approximately 91.2% of the loan portfolio was collateralized by real estate, with commercial real estate mortgage loans representing approximately 72.9% of total loans.
- The Bank’s March 31, 2023 capital ratios were 8.68% leverage, 13.55% Common Equity Tier 1, 13.55% Tier 1 and 14.63% total risk-based capital. Management stated that the Bank met applicable requirements and expected it to remain well capitalized for at least the next 12 months.
Liquidity and Funding
- Cash and cash equivalents were $87.7 million at March 31, 2023, compared with $100.8 million at March 31, 2022. Cash increased by $50.3 million during Q1 2023, primarily due to financing activity.
- The loan-to-deposit ratio, including loans held for sale, was 70.0% at March 31, 2023, compared with 70.9% at December 31, 2022.
- Federal Home Loan Bank advances increased to $85.0 million from $50.0 million at year-end. Securities sold under agreements to repurchase totaled $77.0 million; federal funds purchased were zero.
- Management reported remaining borrowing availability exceeding $405 million, compared with $359.7 million of uninsured deposits excluding secured or collateralized public funds.
- Total uninsured deposits were $434.4 million, including $74.7 million of collateralized public funds. The company had no brokered or listing-service deposits.
Material Changes Versus Prior Comparable Period
- Net interest income benefited from a $66.4 million increase in average earning assets, a $110.2 million increase in average loans and a 30-basis-point improvement in net interest margin. Average loans increased 12.6% year over year to $986.5 million.
- Higher interest rates increased loan and securities yields but also sharply increased funding costs. The cost of deposits, including demand deposits, rose to 0.58% from 0.10%, while the cost of funds rose to 0.92% from 0.13%.
- Non-interest income declined by $799 thousand, primarily because mortgage banking income fell $684 thousand. Secondary-market mortgage production declined to $5.2 million from $30.0 million, reflecting higher mortgage rates and low housing inventory.
- Mortgage activity increasingly shifted toward balance-sheet products: Q1 mortgage production totaled $23.1 million, including $5.4 million of adjustable-rate loans and $12.5 million of new-construction residential commitments.
- Non-interest expense increased $482 thousand, driven by salaries, occupancy, FDIC assessments, legal and professional fees, technology and processing costs. Other real estate expense improved by $180 thousand and debit-card fraud losses declined by $87 thousand.
- The company adopted CECL on January 1, 2023. The adoption reduced retained earnings by $337 thousand after tax, added $397.9 thousand to the allowance for unfunded commitments and established a $43.5 thousand allowance for held-to-maturity securities.
- Accumulated other comprehensive loss improved to $29.5 million from $32.4 million at year-end, primarily because of higher fair values for available-for-sale securities as interest rates declined during the quarter.
Outlook, Risks, Contingencies and Unusual Items
- The filing provides no specific quantitative earnings, revenue or margin guidance.
- Management expects liquidity and capital to be sufficient to support operations for at least the next 12 months, but cautions that future credit losses and recessionary conditions could adversely affect capital ratios and earnings.
- Key risks include rising or changing interest rates, deposit outflows, competition for funding, higher FDIC assessments, declining real estate values, commercial real estate concentration, credit deterioration, regulatory actions, cybersecurity events and general economic weakness.
- The company reported significant unrealized losses in its securities portfolio: available-for-sale securities had $22.5 million of gross unrealized losses at March 31, 2023, while held-to-maturity securities had $10.3 million of gross unrealized losses. Management attributed these primarily to higher market interest rates and recorded no allowance for credit losses on available-for-sale securities.
- The company was liability-sensitive for projected short-term net interest income. Its model estimated that a parallel 100-basis-point rate increase would reduce next-12-month net interest income by 1.14%, while a 100-basis-point decline would increase it by 1.78%, subject to the filing’s assumptions and limitations.
- After quarter-end, effective May 5, 2023, the company entered into a $150 million pay-fixed, receive-floating interest-rate swap maturing May 5, 2026. The swap carries a fixed rate of 3.58% and is designated as a fair-value hedge for fixed-rate loans.
- The company declared a $0.14-per-share quarterly dividend payable May 16, 2023. No share repurchases were made during the quarter; the existing authorization for up to 375,000 shares expires December 31, 2023.
- Management reported no material pending legal proceedings and no material change in internal control over financial reporting.
Investor Verification Items
- Verify the sustainability of the higher net interest margin as deposit and borrowing costs continue to reprice upward.
- Monitor uninsured deposit balances, deposit pricing, liquidity availability and reliance on FHLB advances and repurchase agreements.
- Assess commercial real estate concentration, collateral values and the $3.9 million largest non-accrual loan.
- Track CECL reserve adequacy, future provisions and the effect of economic forecasts on allowance requirements.
- Evaluate the duration and unrealized losses in the available-for-sale and held-to-maturity securities portfolios, including potential effects on tangible capital and liquidity.
- Review mortgage banking production trends and the shift from secondary-market originations toward adjustable-rate and construction loans retained on the balance sheet.
- Confirm the financial reporting and capital effects of the May 2023 interest-rate swap and any future FDIC special assessments.