First munity (FCCO) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended September 30, 2022, reflect asset growth to $1.65 billion, driven by an increase in net loans, while shareholders' equity decreased significantly to $114.1 million due to a $36.5 million other comprehensive loss from unrealized losses on investment securities, and net income for the first nine months of 2022 was $10.6 million, a decrease from $11.5 million in the prior year period, impacted by lower non-interest income and higher non-interest expenses Consolidated Balance Sheets As of September 30, 2022, total assets grew to $1.65 billion from $1.58 billion at year-end 2021, primarily driven by an increase in net loans held-for-investment, while total liabilities also increased, mainly due to growth in deposits, and a significant change was observed in shareholders' equity, which decreased from $141.0 million to $114.1 million, largely because of a substantial increase in accumulated other comprehensive loss from $(33.3) million, reflecting unrealized losses on investment securities Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,651,829 | $1,584,508 | | Net Loans Held-for-Investment | $938,895 | $852,523 | | Investment Securities (AFS & HTM) | $571,651 | $564,839 | | Total Liabilities | $1,537,684 | $1,443,510 | | Total Deposits | $1,436,256 | $1,361,291 | | Total Shareholders' Equity | $114,145 | $140,998 | | Accumulated Other Comprehensive (Loss) | ($33,251) | $3,279 | Consolidated Statements of Income For the nine months ended September 30, 2022, net income was $10.6 million, down from $11.5 million in the prior-year period, driven by a decline in non-interest income, particularly a 51% drop in mortgage banking income, and a 4.2% rise in non-interest expenses, while net interest income saw a slight increase of 1.4%, and for the third quarter of 2022, net income was $4.0 million, compared to $4.7 million in Q3 2021, with diluted EPS at $0.52 versus $0.63 Nine Months Ended September 30 (in thousands, except per share data) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $34,578 | $34,115 | | Provision for (Release of) Loan Losses | ($177) | $394 | | Total Non-interest Income | $9,056 | $10,278 | | Total Non-interest Expense | $30,559 | $29,323 | | Net Income | $10,570 | $11,546 | | Diluted EPS | $1.39 | $1.53 | Three Months Ended September 30 (in thousands, except per share data) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $12,794 | $12,456 | | Provision for Loan Losses | $18 | $49 | | Total Non-interest Income | $2,673 | $3,564 | | Total Non-interest Expense | $10,417 | $9,905 | | Net Income | $3,951 | $4,748 | | Diluted EPS | $0.52 | $0.63 | Consolidated Statements of Comprehensive Income (Loss) The company reported a comprehensive loss of $26.0 million for the nine months ended September 30, 2022, a stark contrast to the $4.9 million comprehensive income in the same period of 2021, primarily driven by a significant $36.5 million other comprehensive loss, net of tax, resulting from unrealized losses on available-for-sale securities and securities transferred to held-to-maturity Comprehensive Income (Loss) Summary (in thousands) | Period | Net Income | Other Comprehensive Loss | Comprehensive Income (Loss) | | :--- | :--- | :--- | :--- | | Nine Months Ended Sep 30, 2022 | $10,570 | ($36,530) | ($25,960) | | Nine Months Ended Sep 30, 2021 | $11,546 | ($6,694) | $4,852 | | Three Months Ended Sep 30, 2022 | $3,951 | ($6,708) | ($2,757) | | Three Months Ended Sep 30, 2021 | $4,748 | ($2,853) | $1,895 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased by $26.9 million during the first nine months of 2022, ending at $114.1 million, with the decline primarily caused by a $36.5 million other comprehensive loss, which more than offset the $10.6 million in net income, and dividends of $2.9 million were paid to common shareholders during the period - Total shareholders' equity fell from $141.0 million at the end of 2021 to $114.1 million at September 30, 2022[21] - The primary driver of the equity reduction was a $36.5 million other comprehensive loss, net of tax, related to unrealized losses on securities[21] - The company paid common dividends of $0.39 per share, totaling $2.9 million for the nine-month period[21] Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, cash and cash equivalents decreased by $30.8 million, with net cash provided by operating activities at $17.8 million, a significant decrease from $53.9 million in the prior year, mainly due to changes in loans held-for-sale, while net cash used in investing activities was $142.1 million, primarily for purchasing investment securities and funding loan growth, and financing activities provided $93.5 million in cash, largely from an increase in deposit accounts Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $17,772 | $53,938 | | Net Cash used in Investing Activities | ($142,056) | ($200,222) | | Net Cash from Financing Activities | $93,515 | $160,986 | | Net (Decrease) Increase in Cash | ($30,769) | $14,702 | - A significant non-cash investing activity was the transfer of $245.6 million of available-for-sale securities to held-to-maturity[26] Notes to Consolidated Financial Statements The notes detail significant accounting policies and provide further information on financial statement items, including the impact of rising interest rates on operations, the reclassification of $224.5 million in securities from available-for-sale to held-to-maturity, a detailed breakdown of the loan portfolio and allowance for loan losses, and segment reporting, with the company also noting its ongoing evaluation of the upcoming CECL accounting standard, expected to be adopted in Q1 2023 - The Federal Open Market Committee (FOMC) increased the target range for federal funds by a total of 3.00% during the first nine months of 2022, significantly impacting market interest rates[31][32] - On June 1, 2022, the company reclassified $224.5 million in investments from available-for-sale (AFS) to held-to-maturity (HTM) to mitigate the impact of rising interest rates on accumulated other comprehensive income[47] - The company is preparing to adopt the Current Expected Credit Loss (CECL) model in the first quarter of 2023, which may have a material effect on its financial statements[71][95] Loan Portfolio Composition (in thousands) | Loan Category | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Commercial, financial and agricultural | $70,712 | $69,952 | | Real estate: Construction | $84,355 | $94,969 | | Real estate: Mortgage-commercial | $698,416 | $617,464 | | Real estate: Mortgage-residential | $53,553 | $45,498 | | Consumer | $43,174 | $35,819 | | Total Loans | $950,210 | $863,702 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results, highlighting a decrease in net income for the first nine months of 2022 to $10.6 million from $11.5 million year-over-year, attributed to lower non-interest income, particularly from mortgage banking, and higher non-interest expenses, while net interest income grew slightly due to increased earning assets, though the net interest margin compressed, and the financial position strengthened with total assets reaching $1.7 billion, driven by strong loan growth, maintaining a strong liquidity and capital position, with all capital ratios exceeding 'well-capitalized' regulatory minimums Comparison of Results of Operations For the nine months ended September 30, 2022, net income fell by $976 thousand compared to the prior year, primarily due to a $1.7 million decline in mortgage banking income and a $1.2 million increase in non-interest expenses, partially offset by a $463 thousand increase in net interest income and a $571 thousand reduction in the provision for loan losses, and the third quarter of 2022 saw net income of $4.0 million, down from $4.7 million in Q3 2021, reflecting similar trends of lower mortgage income and higher operating costs - Net income for the nine months ended Sep 30, 2022, was $10.6 million, a decrease from $11.5 million in the same period of 2021[157] - The decline in non-interest income was primarily driven by a $1.7 million decrease in mortgage banking income[158] - Non-interest expense increased by $1.2 million, mainly due to higher salaries, professional fees, and data processing costs[158] Net Interest Income Net interest income for the first nine months of 2022 increased by 1.4% to $34.6 million, driven by a 10.0% increase in average earning assets to $1.5 billion, however, the net interest margin (tax-equivalent) declined by 25 basis points to 3.05%, primarily due to the deployment of excess liquidity into lower-yielding securities and a significant reduction in high-yield PPP loan income Net Interest Income and Margin (Nine Months Ended Sep 30) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $34.6M | $34.1M | | Average Earning Assets | $1.5B | $1.4B | | Net Interest Margin (Tax-Equivalent) | 3.05% | 3.30% | - Interest income from PPP loans fell to just $48 thousand in the first nine months of 2022, compared to $3.1 million in the same period of 2021[163] Provision and Allowance for Loan Losses The company recorded a provision release (credit) of $177 thousand for the first nine months of 2022, compared to a $394 thousand provision expense in the prior year, primarily due to a reduction in the COVID-19 qualitative factor in the allowance methodology, and the allowance for loan losses stood at $11.3 million, or 1.19% of total loans, at September 30, 2022, while non-performing assets increased to 0.36% of total assets, up from 0.09% at year-end 2021, mainly because one $4.1 million loan was moved to non-accrual status Allowance and Asset Quality Ratios | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Allowance for Loan Losses | $11.3M | $11.2M | | Allowance / Total Loans | 1.19% | 1.29% | | Non-performing Assets / Total Assets | 0.36% | 0.09% | | Non-accrual Loans | $4.9M | $0.25M | - The increase in non-performing assets was primarily due to one $4.1 million loan being placed on non-accrual status in June 2022[178] Financial Position Total assets grew to $1.7 billion at September 30, 2022, an increase of $67.3 million from year-end 2021, fueled by an $86.5 million increase in loans (excluding loans held-for-sale), and deposits also grew by $75.0 million to $1.4 billion, while shareholders' equity declined by $26.9 million to $114.1 million, primarily due to unrealized losses on the investment portfolio, which led to a reclassification of $224.5 million in securities to held-to-maturity to mitigate further equity volatility - Total assets reached $1.7 billion at September 30, 2022[212] - Loans (excluding held-for-sale) increased by $86.5 million since December 31, 2021[212] - Total deposits increased by $75.0 million to $1.4 billion[228] - Shareholders' equity declined to 6.9% of total assets from 8.9% at year-end, driven by a $36.5 million reduction in accumulated other comprehensive income[232] Liquidity and Capital Resources The company maintains a strong liquidity position with ample capacity to meet funding needs through core deposits and access to borrowing lines, and capital ratios remain robust and well above regulatory minimums for a 'well-capitalized' institution, with the Bank's Tier 1 leverage ratio at 8.53%, Common Equity Tier 1 ratio at 13.42%, and Total Capital ratio at 14.49% as of September 30, 2022, and the decline in shareholders' equity due to AOCI changes did not materially impact regulatory capital, as the company has opted out of including AOCI in its regulatory capital calculations Bank Regulatory Capital Ratios | Ratio | Sep 30, 2022 | Well-Capitalized Minimum | | :--- | :--- | :--- | | Leverage Ratio | 8.53% | 5.00% | | Common Equity Tier 1 Capital Ratio | 13.42% | 6.50% | | Tier 1 Capital Ratio | 13.42% | 8.00% | | Total Capital Ratio | 14.49% | 10.00% | - The company has opted out of including Accumulated Other Comprehensive Income (AOCI) in its regulatory capital calculations, mitigating the impact of unrealized securities losses on its capital ratios[253] - The Board of Directors approved a cash dividend of $0.13 per common share payable on November 15, 2022[259] Quantitative and Qualitative Disclosures About Market Risk This item is marked as not applicable for this filing - The company has indicated that this section is not applicable[271] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2022, with no material changes to the company's internal control over financial reporting during the third quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[273] - No material changes were made to internal control over financial reporting during the quarter ended September 30, 2022[275] PART II – OTHER INFORMATION Legal Proceedings The company is party to various claims and lawsuits arising in the normal course of business, but management is not aware of any pending legal proceedings that would have a material adverse impact on its financial condition - There are no material pending legal proceedings against the company[278] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - The report refers to the risk factors identified in the Annual Report on Form 10-K for the year ended December 31, 2021, with no material updates provided in this quarterly report[279] Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of 2022, the company credited 1,696 deferred stock units to directors under the Non-Employee Director Deferred Compensation Plan, and no shares were repurchased during the quarter under the 2022 Repurchase Plan, which authorizes the repurchase of up to 375,000 shares and expires on December 31, 2023 - On April 20, 2022, the Board approved a repurchase plan for up to 375,000 shares of common stock, valid through December 31, 2023, with no shares repurchased in Q3 2022[280] - Deferred stock units were issued to directors as part of their compensation plan, exempt from registration under Section 4(a)(2) of the Securities Act of 1933[280] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer, and the iXBRL formatted financial statements - Exhibits filed include CEO and CFO certifications (31.1, 31.2), Section 1350 certifications (32), and iXBRL data files (101, 104)[289][290][291][292]