Business Context and Reporting Period
First Community Corporation, a South Carolina bank holding company for First Community Bank, filed this unaudited Form 10-Q for the three months ended March 31, 2021. The company provides commercial and retail banking, mortgage banking, investment advisory and non-deposit services. The filing was signed May 7, 2021; 7,524,944 common shares were outstanding as of May 7, 2021.
Key Financial Metrics
| Metric | Q1 2021 | Comparable period or prior date |
|---|---|---|
| Total assets | $1.492 billion | $1.395 billion at December 31, 2020 |
| Total loans held for investment | $869.1 million | $844.2 million at December 31, 2020 |
| Total deposits | $1.271 billion | $1.189 billion at December 31, 2020 |
| Net interest income | $10.6 million | $9.4 million in Q1 2020 |
| Non-interest income | $3.3 million | $2.9 million in Q1 2020 |
| Net income | $3.3 million | $1.8 million in Q1 2020 |
| Diluted earnings per share | $0.43 | $0.24 in Q1 2020 |
| Net interest margin | 3.20% | 3.52% in Q1 2020 |
| Provision for loan losses | $177 thousand | $1.075 million in Q1 2020 |
| Net cash provided by operating activities | $26.0 million | $2.5 million in Q1 2020 |
| Cash and cash equivalents | $112.9 million | $65.0 million at December 31, 2020 |
| Shareholders’ equity | $132.7 million | $136.3 million at December 31, 2020 |
Net income increased approximately 81% year over year. Net interest income increased 12.2%, reflecting 24.3% growth in average earning assets to $1.339 billion, partially offset by a 32-basis-point decline in net interest margin. The effective tax rate was 21.5%, compared with 19.6% in Q1 2020.
Non-interest income benefited from $990 thousand of mortgage banking income, $877 thousand of investment advisory fees and non-deposit commissions, and $1.106 million of other income. Non-interest expense was $9.5 million, up from $9.0 million, primarily because of higher salaries and benefits, occupancy costs and FDIC assessments.
Credit Quality, Capital and Liquidity
- The allowance for loan losses was $10.6 million, or 1.22% of total loans, compared with 1.03% at March 31, 2020 and 1.23% at December 31, 2020.
- Net loan charge-offs were $3 thousand for the quarter. Non-performing assets were $5.6 million, or 0.37% of total assets, compared with $7.0 million, or 0.50%, at December 31, 2020.
- Loans past due 30 days or more were $317 thousand, or 0.04% of total loans, compared with $1.9 million, or 0.23%, at December 31, 2020.
- PPP loans totaled $61.8 million net of deferred fees and costs at March 31, 2021, compared with $42.2 million at December 31, 2020.
- The Bank remained well capitalized, with an 8.73% leverage ratio, 13.20% common equity Tier 1 ratio, 13.20% Tier 1 capital ratio and 14.34% total capital ratio.
- The loan-to-deposit ratio, including loans held for sale, declined to 70.2% from 74.8% at December 31, 2020. Management reported no unusual liquidity pressure and identified deposits, correspondent-bank lines, repurchase funding and Federal Home Loan Bank borrowing capacity as liquidity sources.
- Unused credit commitments totaled $141.7 million at March 31, 2021, including $41.6 million of unused home equity lines.
Material Changes Versus Prior Comparable Period
- Net income rose $1.5 million, driven by higher net interest income, higher non-interest income and the substantially lower loan-loss provision.
- Average loans increased 17.6% to $886.4 million. Average PPP loans were $55.5 million, while average non-PPP loans increased to $830.8 million.
- Interest expense declined to $651 thousand from $1.293 million as deposit and borrowing costs fell. The cost of interest-bearing liabilities declined to 0.29% from 0.69%.
- Loan yields declined to 4.32% from 4.71%, and securities yields declined to 1.88% from 2.42%, reflecting the low-rate environment and excess liquidity.
- Mortgage production increased to $42.7 million from $35.3 million, while mortgage banking income was broadly unchanged. Management indicated that the first-quarter gain-on-sale margin of 2.32% was below its expected normal range of approximately 3.00% to 3.25% because of processing and delivery issues.
- Investment advisory assets under management increased to $519.3 million from $319.7 million, and related fees increased $243 thousand.
- Shareholders’ equity declined 2.7% from year-end, primarily because accumulated other comprehensive income decreased $6.2 million as longer-term interest rates increased and unrealized securities gains declined.
- Comprehensive income was a loss of $2.9 million, compared with comprehensive income of $5.2 million in Q1 2020, because of a $6.2 million after-tax unrealized loss on available-for-sale securities.
Outlook, Risks and Unusual Items
The filing provides no formal earnings or revenue guidance. Management stated that it expects the Bank to remain well capitalized for at least the next 12 months and throughout the COVID-19 pandemic, while acknowledging that future pandemic-related credit losses could reduce capital ratios. Management also expects mortgage gain-on-sale margins to recover toward approximately 3.00% to 3.25% as processing and delivery efficiency improves.
- COVID-19 remains a material uncertainty affecting borrowers, collateral values, loan demand, deposit service charges, net interest margin, operating expenses and future credit losses.
- Loan payment deferrals declined to $8.7 million at March 31, 2021 from a peak of $206.9 million in Q2 2020 and $16.1 million at December 31, 2020. The remaining deferrals involved three loans, with principal-only payments deferred.
- Exposure to pandemic-sensitive industries included retail loans of $82.4 million, hotels of $33.2 million, restaurants of $22.2 million and assisted living of $8.8 million.
- Approximately 86.3% of the loan portfolio was collateralized by real estate, creating sensitivity to real estate values and economic conditions.
- Rising interest rates could reduce the value of the securities portfolio and accumulated other comprehensive income; changes in rates could also affect net interest income. The company’s modeled 12-month net interest income sensitivity at March 31, 2021 ranged from a 1.39% decline under a 200-basis-point increase to a 6.89% decline under a 200-basis-point decrease.
- The company’s 2011 equity incentive plan expired March 15, 2021, and a replacement plan was submitted for shareholder consideration.
- On April 12, 2021, the board authorized repurchases of up to 375,000 shares, approximately 5% of shares outstanding; no repurchases occurred during the quarter.
- The company declared a first-quarter cash dividend of $0.12 per share, payable May 18, 2021.
- Management reported no material pending legal proceedings, no material subsequent events requiring disclosure and effective disclosure controls as of March 31, 2021.
Important Facts for Investors to Verify
- Whether the lower provision for loan losses is sustainable as COVID-19 support programs and loan deferrals expire.
- The performance and forgiveness timing of the $61.8 million net PPP loan portfolio, including the recognition of approximately $2.2 million of net deferred PPP fees.
- Future net interest margin trends given excess liquidity, low short-term rates, loan pricing pressure and potential changes in longer-term rates.
- Credit performance in commercial real estate, retail, hotel, restaurant and assisted-living exposures, as well as the $8.7 million of remaining payment deferrals.
- The effect of securities-market movements on accumulated other comprehensive income, tangible capital and reported shareholders’ equity.
- Execution of the mortgage banking process improvements and whether gain-on-sale margins return to management’s stated 3.00% to 3.25% normal range.
- The terms, timing and capital impact of the newly authorized share repurchase program and proposed equity incentive plan.