First Community Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
First Community Corporation is a South Carolina-based bank holding company for First Community Bank. Its principal activities are commercial and retail banking, mortgage banking, and investment advisory and non-deposit services. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared primarily with the three months ended March 31, 2021 and, for balance-sheet items, December 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Comparable / prior period |
|---|---|---|
| Net income | $3.489 million | $3.255 million in Q1 2021 |
| Diluted EPS | $0.46 | $0.43 in Q1 2021 |
| Net interest income | $10.733 million | $10.567 million in Q1 2021 |
| Net interest margin | 2.87% | 3.20% in Q1 2021 |
| Tax-equivalent net interest margin | 2.91% | 3.23% in Q1 2021 |
| Non-interest income | $3.374 million | $3.296 million in Q1 2021 |
| Non-interest expense | $9.954 million | $9.540 million in Q1 2021 |
| Provision for loan losses | $(0.125) million credit | $0.177 million provision in Q1 2021 |
| Total assets | $1.652 billion | $1.585 billion at December 31, 2021 |
| Gross loans held for investment | $875.8 million | $863.7 million at December 31, 2021 |
| Total deposits | $1.431 billion | $1.361 billion at December 31, 2021 |
| Shareholders’ equity | $125.4 million | $141.0 million at December 31, 2021 |
Net income increased approximately 7.2% year over year. The effective tax rate was 18.4%, compared with 21.5% in Q1 2021, including a $153 thousand non-recurring reduction in tax expense in Q1 2022. The filing does not provide a consolidated revenue or net-profit margin measure; net interest margin is the principal banking margin disclosed.
Cash flow, liquidity, debt, and capital
- Operating activities used $1.605 million of cash in Q1 2022, compared with $25.963 million provided in Q1 2021. Investing activities used $49.107 million, while financing activities provided $82.482 million.
- Cash and cash equivalents increased by $31.770 million during the quarter to $100.792 million.
- Investment securities available-for-sale totaled $577.8 million at March 31, 2022. Rising interest rates produced an $18.288 million after-tax unrealized loss and reduced accumulated other comprehensive income by the same amount.
- Debt and secured funding included $68.060 million of securities sold under repurchase agreements and $14.964 million of junior subordinated debt. No Federal Home Loan Bank advances were outstanding.
- Management stated that liquidity was ample, supported by core deposits, $60.0 million of federal-funds-purchased lines, a $10.0 million Federal Reserve Discount Window line, and FHLB borrowing capacity of up to 25% of bank assets.
- The loan-to-deposit ratio was 62.1% including loans held for sale and 61.2% excluding loans held for sale at March 31, 2022.
- The Bank remained well capitalized. Regulatory ratios were an 8.43% leverage ratio, 13.89% common equity Tier 1 ratio, 13.89% Tier 1 ratio, and 15.03% total capital ratio.
Material changes versus prior comparable period
- Average earning assets increased 13.2% to approximately $1.5 billion, but the net interest margin declined 33 basis points to 2.87%. Lower loan and securities yields, excess liquidity invested in lower-yielding assets, and the reduction in PPP loan income contributed to the margin contraction.
- Average loans declined 1.1% to $876.3 million, largely because average PPP loans fell to $0.6 million from $55.5 million. Average non-PPP loans increased by approximately $44.9 million.
- Average securities increased 53.2% to $571.8 million as deposit growth and excess liquidity were deployed into securities.
- Non-interest income increased 2.4%. Investment advisory fees and non-deposit commissions rose $321 thousand, while mortgage banking income declined $151 thousand.
- Mortgage production declined to $30.0 million from $42.7 million, primarily because of low housing inventories and higher interest rates. The gain-on-sale margin nevertheless increased to 2.80% from 2.32%.
- Non-interest expense increased 4.3% to $9.954 million, including higher salaries, technology and data-processing costs, and a $108 thousand increase in fraud expense related to an isolated incident.
- Gross loans increased $12.1 million from year-end, while deposits increased $69.5 million. Securities sold under repurchase agreements increased $13.8 million.
- Shareholders’ equity declined 11.1% because of the $18.3 million after-tax unrealized securities loss, partly offset by retained earnings after dividends and equity awards.
Asset quality, outlook, risks, and unusual items
- The allowance for loan losses was $11.1 million, or 1.26% of total loans, compared with $11.2 million, or 1.29%, at December 31, 2021. The quarter included a $125 thousand credit provision.
- Non-performing assets were $1.5 million, or 0.09% of total assets. Non-accrual loans declined to $148 thousand from $250 thousand, while loans 90 days past due and still accruing increased to $174 thousand from zero.
- COVID-19-related payment deferrals were zero at March 31, 2022. Of $88.5 million in PPP loans originated during 2020 and 2021, $88.2 million had been forgiven through the SBA process by quarter-end.
- Management continues to identify COVID-19, inflation, supply-chain bottlenecks, labor shortages, rising interest rates, the war in Ukraine, and potential deterioration in real estate collateral as risks to credit quality, liquidity, margins, and capital.
- Approximately 90.7% of the loan portfolio was collateralized by real estate. The commercial mortgage portfolio represented 71.7% of gross loans, creating concentration exposure to commercial real estate conditions.
- Management expects the Bank to remain well capitalized and believes liquidity and capital are sufficient for at least the next 12 months, but notes that future credit losses or recessionary conditions could reduce regulatory capital.
- The Company is preparing for adoption of the current expected credit loss model in 2023. Management states that implementation may have a material effect, but the amount of any opening adjustment was not yet determinable.
- No formal earnings or revenue guidance was provided. Management is exploring additional adjustable-rate mortgage products to address expected mortgage-production pressure.
- The Board approved a $0.13-per-share first-quarter dividend, payable May 17, 2022. A new authorization to repurchase up to 375,000 shares was announced on April 20, 2022; no shares were repurchased under the prior plan before it expired.
- Management reported no material pending legal proceedings and no subsequent events requiring disclosure. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Most important facts for an investor to verify
- Whether rising interest rates improve asset yields faster than they increase deposit and funding costs, reversing the 33-basis-point decline in net interest margin.
- The duration, unrealized-loss exposure, and potential capital impact of the available-for-sale securities portfolio.
- The concentration and performance of commercial real estate loans, including trends in classified, delinquent, non-accrual, and impaired loans.
- The size and capital impact of the 2023 CECL adoption adjustment.
- The sustainability of deposit growth, the $430.6 million of total uninsured deposits, and reliance on repurchase agreements or other secured funding.
- Whether mortgage production continues to decline and whether new adjustable-rate products offset lower refinancing and purchase volume.
- The effect of the non-recurring tax benefit, isolated fraud expense, and other unusual items on normalized earnings.
- Progress and execution of the new share repurchase authorization while maintaining well-capitalized regulatory ratios.