First Community Corporation (Nasdaq: FCCO), the holding company for First Community Bank, reported net income for the third quarter of 2020 of $2.652 million as compared to $2.898 million in the third quarter of 2019. Diluted earnings per common share were $0.35 for the third quarter of 2020 as compared to $0.39 for the third quarter of 2019. On a linked quarter basis, net income increased 19.6% from $2.217 million in the second quarter of 2020 and diluted earnings per common share increased 16.7% from $0.30. Pre-tax pre-provision earnings or PTPPE in the third quarter of 2020 were $4.312 million compared to third quarter of 2019 PTPPE of $3.676 million and second quarter 2020 PTPPE of $3.999 million, an increase of 17.3% and 7.8% respectively. It should be noted that during the quarter, the company benefited from non-recurring Bank Owned Life Insurance (BOLI) income in the amount of $311 thousand and a gain on sale of securities in the amount of $99 thousand.
Year-to-date through September 30, 2020 net income was $6.663 million compared to $8.274 million during the first nine months of 2019. Diluted earnings per share for the first nine months of 2020 were $0.89, compared to $1.08 during the same time period in 2019. Year-to-date through September 30, 2020 PTPPE were $11.618 million compared to $10.544 million during the first nine months of 2019, an increase of 10.2%. Mike Crapps, First Community President and CEO, commented, “We are pleased with our continued growth in core pre-tax pre-provision earnings even during these unprecedented times. While our credit metrics remain strong, again this quarter the provision expense for loan losses was elevated in anticipation of potential future impact from the COVID-19 pandemic.”
Cash Dividend and Capital
The Board of Directors approved a cash dividend for the third quarter of 2020. The company will pay a $0.12 per share dividend to holders of the company’s common stock. This dividend is payable November 16, 2020 to shareholders of record as of November 2, 2020. Mr. Crapps commented, “Our entire board is pleased that our performance enables the company to continue its cash dividend for the 75th consecutive quarter.”
During the third quarter, no share repurchases have been made under the company’s existing share repurchase plan approved during the third quarter of 2019. The existing repurchase plan provides the company with some flexibility in managing capital going forward.
In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company. As a result of this change, the company is generally not subject to the Federal Reserve capital requirements unless advised otherwise. The bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. These requirements are essentially the same as those that applied to the company prior to the change in the definition of a small bank holding company. Each of the regulatory capital ratios for the bank exceed the well capitalized minimum levels currently required by regulatory statute. At September 30, 2020, the bank’s regulatory capital ratios (Leverage, Tier I Risk Based and Total Risk Based) were 8.95%, 12.97%, and 14.08%, respectively. This compares to the same ratios as of September 30, 2019 of 10.12%, 13.39%, and 14.18%, respectively. As of September 30, 2020, the bank’s Common Equity Tier I ratio was 12.97% compared to 13.39% at September 30, 2019.
Asset Quality / Allowance for Loan and Lease Losses
Asset quality metrics remained strong as of September 30, 2020. The non-performing assets ratio for the third quarter was 0.22% of total assets and a total past due ratio of 0.08%. Net loan recoveries excluding overdrafts for the quarter were $118 thousand and the year-to-date through September 30, 2020 net recovery is $121 thousand. The ratio of classified loans plus OREO now stands at 5.00% of total bank regulatory risk-based capital as of September 30, 2020.
Mr. Crapps indicated, “As a way to serve our many local businesses and individuals during the past few challenging months, we proactively offered payment deferrals for up to 90 days to our loan customers.” The company reported that at its peak, there were payment deferments on loans totaling approximately $206.9 million (26.9% of the non-PPP loan portfolio). Loans in which payments have been deferred decreased to $27.3 million (3.4% of the non-PPP loan portfolio) at September 30, 2020 and $21.8 million (2.7% of the non-PPP loan portfolio) at October 15, 2020. This is primarily the result of payments being restarted at the conclusion of their payment deferral period. It is also noteworthy that the percentage of loans, in certain identified industries deemed to be “high risk” due to the pandemic, is largely unchanged from prior disclosures.
Even with strong credit quality metrics, due to the uncertainty of future credit losses related to the COVID-19 pandemic and its effect on local businesses, the bank recorded $1.062 million in provision expense in the third quarter compared to $25 thousand in the third quarter of 2019. Year-to-date through September 30, 2020, the bank has recorded $3.387 million in provision expense compared to $139 thousand during the first nine months of 2019. During the first nine months of 2020, the ratio of the Allowance for Loan Loss to total loans has increased from 0.90% as of December 31, 2019 to 1.20% as of September 30, 2020. Mr. Crapps commented, “Our credit metrics continue to indicate the current strong quality of our loan portfolio. This combined with the significant reduction in loans with payments deferred is good news for our company. At the same time, there is much unknown about the economic impact of the pandemic; therefore, we continue to prepare our balance sheet and our resources for an uncertain future.”
Total loans increased during the third quarter by $27.1 million, which is an annualized growth rate of 13.2%. Total loans, excluding PPP loans, increased during the third quarter by $25.2 million which is an annualized growth rate of 13.0%. Non-PPP loan growth during the quarter was the result of increased production on a linked quarter. Commercial loan production was $46.1 million during the third quarter compared to $39.3 million in the second quarter of 2020.
As of September 30, 2020, the bank had $59.8 million in PPP loans and related credit facilities on the balance sheet. Crapps noted, “As a community bank committed to the success of local businesses, we were pleased to be able to support our customers with access to the PPP funding. We are now in the initial stages of working with our customers through the SBA forgiveness process. We anticipate this process to accelerate later in the fourth quarter and into the first half of 2021.”
Total deposits were $1.174 billion at September 30, 2020 compared to $1.119 billion at June 30, 2020. Pure deposits, which are defined as total deposits less certificates of deposits, increased $53.2 million or 5.4% to $1.037 billion at September 30, 2020 from $983.8 million at June 30, 2020. The bank had no brokered deposits and no listing services deposits at September 30, 2020. Securities sold under agreements to repurchase, which are related to customer cash management accounts or business sweep accounts, increased 3.1% to $47.1 million at September 2020 compared to 45.7 million at June 30, 2020. Costs of deposits decreased on a linked quarter basis to 0.23% in the third quarter of 2020 from 0.28 in the second quarter of the year. Cost of funds also decreased on a linked quarter basis to 0.27% in the third quarter of 2020 from 0.33 in the second quarter of the year. Mr. Crapps commented, “A strength of our bank has been and continues to be our low cost deposit base. During 2020, we have continued to grow pure deposits while at the same time working to reduce our cost of deposits.”
Net Interest Income/Net Interest Margin
Net interest income increased $433 thousand or 4.4% to $10.176 million for the third quarter of 2020 compared to second quarter net interest income of $9.743 million. Year-over-year, net interest income increased $823 thousand or 8.8% from $9.353 million in the third quarter of 2019. Third quarter net interest margin, on a tax equivalent basis, was 3.28% compared to net interest margin of 3.38% in the second quarter. Third quarter net interest margin, excluding PPP loans, on a tax equivalent basis, was 3.29%. The net interest margin has declined as a result of excess liquidity on the bank’s balance sheet and continued downward pressure on earning asset yields, which are partially offset by lower deposit costs.
Total non-interest income increased 13.7% on a linked quarter basis, from $3.387 million in the second quarter of 2020 to $3.850 million in the third quarter. With adjustments for non-recurring items including BOLI income of $311 thousand and gain-on-sale of securities of $99 thousand during the third quarter, non-interest income increased 1.6% on a linked quarter basis to $3.440 million in the third quarter of 2020 up from $3.387 million in the second quarter of this year. Year-over-year, non-interest income, adjusted for securities gains and losses and other non-recurring income, increased 10.5% from $3.113 million in the third quarter of 2019. Revenues in the mortgage line of business increased 12.2% year-over-year to $1.403 million compared to $1.251 million in the third quarter of 2019. Mortgage loan production increased 49.9% year-over-year from $37.9 million in the third quarter of 2019 to $56.8 million in the third quarter of 2020. The gain-on-sale margin continued to be negatively impacted by disruptions in the mortgage market causing certain loans to not be sold. As capacity rebuilds, this issue will be mitigated.
Revenue in the investment advisory line of business was flat on a linked quarter basis at $672 thousand in the third quarter of 2020 and $671 thousand in the second quarter and increased 32.0% year-over-year from $509 thousand in the third quarter of 2019. It is noteworthy that the assets under management (AUM), which was $369.7 million at December 31, 2019, has increased by 17.9% to $436.0 million at September 30, 2020. Mr. Crapps commented, “Our strategy of multiple revenue streams continues to serve us well as we focus our efforts to accelerate growth in these lines of business. We are pleased with the activity and momentum in each of our business units.”
Non-interest expense was $9.714 million in the third quarter of 2020, compared to $9.131 million in the second quarter of 2020. Salaries and benefits expense increased $247 thousand on a linked quarter basis. The second quarter benefited from deferred loan costs associated with PPP loans that served to offset some salary and benefit costs during that quarter. Additionally, compensation costs related to the mortgage line of business increased in the third quarter. Marketing and public relations expense increased $95 thousand due to planned increases in advertising during the quarter. Occupancy expense increased $57 thousand due to enhanced cleaning of bank facilities related to COVID-19, more typical utility expense which had been lower than normal in the second quarter, and the restart during the third quarter of maintenance and small repairs that had been paused or otherwise had timing affected during the second quarter due to the pandemic. FDIC insurance expense increased $49 thousand due to a higher assessment base and a higher assessment rate related to a decrease in the bank’s leverage ratio due to an increase in assets. OREO expenses increased $39 thousand in the third quarter due to the write down of several OREO properties during the quarter.
About First Community Corporation
First Community Corporation stock trades on the NASDAQ Capital Market under the symbol “FCCO” and is the holding company for First Community Bank, a local community bank based in the Midlands of South Carolina. First Community Bank is a full-service commercial bank offering deposit and loan products and series, residential mortgage lending and financial planning/investment advisory services for businesses and consumers. First Community serves customers in the Midlands, Aiken, and Greenville, South Carolina markets as well as Augusta, Georgia. For more information, visit www.firstcommunitysc.com.