First Community Corporation 10-Q Summary
Business Context and Reporting Period
First Community Corporation, the parent of First Community Bank, filed its Form 10-Q for the quarter ended March 31, 2020. The company operates commercial and retail banking, mortgage banking, and investment advisory and non-deposit businesses, primarily in its local markets. Amounts below are in thousands unless otherwise noted.
Key Financial Metrics
| Metric | Q1 2020 | Comparable / Prior Period |
|---|---|---|
| Total assets | $1,185,307 at March 31 | $1,170,279 at December 31, 2019 |
| Net interest income | $9,417 | $9,020 in Q1 2019 |
| Net interest margin | 3.52% | 3.68% in Q1 2019 |
| Provision for loan losses | $1,075 | $105 in Q1 2019 |
| Non-interest income | $2,928 | $2,509 in Q1 2019 |
| Non-interest expense | $9,038 | $8,323 in Q1 2019 |
| Net income | $1,794 | $2,495 in Q1 2019 |
| Diluted earnings per share | $0.24 | $0.32 in Q1 2019 |
| Comprehensive income | $5,175 | $4,800 in Q1 2019 |
| Operating cash flow | $2,567 provided | $2,165 used in Q1 2019 |
- Average earning assets increased 8.4% to $1.077 billion, while average loans increased 4.1% to $753.7 million.
- Gross loans were $749.5 million, up $12.5 million, or 1.7%, from December 31, 2019. Commercial real estate represented 70.8% of the loan portfolio, and approximately 91.9% of loans had real estate collateral.
- Total deposits were $986.6 million, down slightly from $988.2 million at year-end. Pure deposits increased 0.3% to $850.0 million.
- Net loans were $741.8 million after a $7.7 million allowance for loan losses. The allowance equaled 1.03% of total loans, compared with 0.90% at year-end and 0.88% one year earlier.
- Cash and cash equivalents were $49.4 million at March 31, 2020, compared with $47.7 million at December 31, 2019. Available-for-sale securities totaled $288.9 million.
- Securities sold under agreements to repurchase increased to $46.0 million from $33.3 million. Federal Home Loan Bank advances were negligible at quarter-end, while junior subordinated debt was $15.0 million.
- Shareholders’ equity rose 3.7% to $124.6 million, primarily from retained earnings and a $3.4 million increase in accumulated other comprehensive income from unrealized securities gains.
- The effective tax rate was 19.6%, compared with 19.5% in Q1 2019.
Material Changes Versus the Prior Comparable Period
- Net income declined 28.1%, primarily because the loan-loss provision increased $970 and non-interest expense increased $715. These effects more than offset higher net interest income, higher non-interest income, and lower tax expense.
- Net interest income increased 4.4%, but net interest margin declined 16 basis points to 3.52%. Lower market rates, Federal Reserve rate cuts, a flat-to-inverted yield curve, competitive loan pricing, and COVID-19 effects pressured asset yields.
- Non-interest income increased 16.7%, led by mortgage banking income of $982 versus $844 and investment advisory and non-deposit commissions of $634 versus $438. Mortgage production increased to $35.3 million from $25.8 million.
- Non-interest expense increased 8.6%, led by salaries and employee benefits, which rose to $5,653 from $5,170, and marketing and public relations expense, which rose to $354 from $175.
- Loan quality metrics remained relatively sound at quarter-end: non-performing assets were approximately $3.4 million, or 0.29% of total assets, and loans past due 30 days or more were 0.11% of the loan portfolio.
- Net charge-offs were $8, compared with $14 in Q1 2019; the higher provision primarily reflected increased qualitative reserves for COVID-19-related economic uncertainty rather than realized charge-offs.
Guidance, Outlook, Risks, and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expects the Bank to remain well capitalized through the COVID-19 pandemic based on strong capital, conservative underwriting, and internal stress testing, but acknowledges that future credit losses could reduce capital ratios.
- COVID-19 materially increased uncertainty around borrower repayment capacity, collateral values, loan demand, net interest income, non-interest income, liquidity, and future provision expense. Management stated that the ultimate impact could not be determined.
- As of March 31, 2020, the Bank had granted 183 COVID-19-related loan deferrals totaling $118.3 million. By May 4, 2020, deferrals had increased to 383 totaling approximately $202.4 million.
- The Bank participated in the Paycheck Protection Program and had funded 545 PPP loans totaling $42.7 million as of May 6, 2020. Risks include borrower litigation, SBA guaranty or forgiveness issues, compliance deficiencies, reputational damage, and potential credit losses.
- COVID-19-exposed loan segments included retail of $75.5 million, hotels of $26.8 million, restaurants of $17.6 million, and assisted living of $9.2 million.
- Management reported ample liquidity through low-cost deposits, correspondent-bank lines, securities sold under agreements to repurchase, Federal Home Loan Bank advances, and eligibility for the Paycheck Protection Program Liquidity Facility. Federal funds purchased lines totaled $25.0 million and an additional $10.0 million was available through the Federal Reserve Discount Window; these facilities were not utilized at March 31.
- Unused commitments to extend credit totaled $132.0 million, including $40.2 million of unused home equity lines, creating potential future funding exposure.
- Bank regulatory capital ratios exceeded well-capitalized thresholds: leverage ratio 9.91%, Common Equity Tier 1 ratio 13.35%, Tier 1 ratio 13.35%, and total capital ratio 14.25%.
- The company declared a first-quarter cash dividend of $0.12 per common share, payable May 18, 2020. No shares were repurchased under the authorized 200,000-share repurchase plan.
- The company had not adopted the CECL credit-loss model and expected adoption on January 1, 2023. Management could not yet determine the magnitude of the resulting allowance adjustment.
Most Important Facts for Investors to Verify
- Whether COVID-19 deferrals, PPP loans, and exposure to retail, hospitality, assisted living, and commercial real estate result in higher non-performing assets, charge-offs, or loan-loss provisions in subsequent quarters.
- Whether the 3.52% net interest margin continues to contract following the Federal Reserve’s rate cuts and the low-rate environment.
- The sustainability and credit quality of the $749.5 million loan portfolio, particularly its 70.8% commercial mortgage concentration and substantial real estate collateral dependence.
- Actual PPP loan forgiveness, SBA guaranty performance, processing costs, and any related litigation or regulatory issues.
- Liquidity usage, deposit trends, borrowings, and unused lending commitments as customer cash needs evolve.
- Future changes in accumulated other comprehensive income, securities valuations, and regulatory capital ratios.
- The eventual impact of CECL adoption on the allowance for loan losses, retained earnings, and regulatory capital.