First munity (FCCO) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's total assets grew to $1.79 billion and deposits to $1.49 billion by September 30, 2023, while Q3 net income significantly declined to $1.8 million Consolidated Balance Sheets Total assets reached $1.79 billion and total deposits $1.49 billion by September 30, 2023, driven by growth in net loans held-for-investment Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $1,793,722 | $1,672,946 | $120,776 | 7.2% | | Net Loans Held-for-Investment | $1,079,827 | $969,521 | $110,306 | 11.4% | | Total Deposits | $1,492,026 | $1,385,382 | $106,644 | 7.7% | | Federal Home Loan Bank advances | $80,000 | $50,000 | $30,000 | 60.0% | | Total Liabilities | $1,670,121 | $1,554,585 | $115,536 | 7.4% | | Total Shareholders' Equity | $123,601 | $118,361 | $5,240 | 4.4% | Consolidated Statements of Income Net income for Q3 2023 significantly decreased to $1.8 million from $4.0 million in Q3 2022, primarily due to lower net interest income and a securities sale loss Q3 2023 vs Q3 2022 Performance (in thousands, except per share) | Metric | Q3 2023 | Q3 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $12,103 | $12,794 | -5.4% | | Provision for Credit Losses | $474 | $18 | 2533.3% | | Total Non-interest Income | $1,864 | $2,673 | -30.3% | | Total Non-interest Expense | $11,273 | $10,417 | 8.2% | | Net Income | $1,756 | $3,951 | -55.6% | | Diluted EPS | $0.23 | $0.52 | -55.8% | Nine Months 2023 vs 2022 Performance (in thousands, except per share) | Metric | Nine Months 2023 | Nine Months 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $36,597 | $34,578 | 5.8% | | Provision for (Release of) Credit Losses | $730 | $(177) | N/A | | Total Non-interest Income | $7,490 | $9,056 | -17.3% | | Total Non-interest Expense | $32,464 | $30,559 | 6.2% | | Net Income | $8,546 | $10,570 | -19.1% | | Diluted EPS | $1.12 | $1.39 | -19.4% | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for Q3 2023 was $187,000, a turnaround from a $2.8 million loss in Q3 2022, driven by reduced unrealized securities losses Comprehensive Income (Loss) Summary (in thousands) | Period | Net Income | Other Comprehensive Loss | Comprehensive Income (Loss) | | :--- | :--- | :--- | :--- | | Q3 2023 | $1,756 | $(1,569) | $187 | | Q3 2022 | $3,951 | $(6,708) | $(2,757) | | 9M 2023 | $8,546 | $(671) | $7,875 | | 9M 2022 | $10,570 | $(36,530) | $(25,960) | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $123.6 million by September 30, 2023, primarily due to net income, partially offset by dividends and comprehensive loss - For the nine months ended September 30, 2023, total shareholders' equity increased by $5.2 million[16] - Key drivers of the change in equity for the nine months ended September 30, 2023 include: Net Income of $8.5 million, cash dividends of $3.2 million, and an other comprehensive loss of $0.7 million[16] Consolidated Statements of Cash Flows Net cash from operating activities decreased to $3.7 million for the nine months ended September 30, 2023, while overall cash and cash equivalents increased by $60.1 million Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $3,717 | $17,772 | | Net Cash Used in Investing Activities | $(54,438) | $(142,056) | | Net Cash from Financing Activities | $110,776 | $93,515 | | Net Increase (Decrease) in Cash | $60,055 | $(30,769) | Notes to Consolidated Financial Statements Key notes include the adoption of CECL, significant reduction in non-accrual loans to $61,000, and the introduction of $48.2 million in brokered deposits - The company adopted ASU 2016-13 (CECL) on January 1, 2023, resulting in a net decrease to retained earnings of $337,400[26] - As of September 30, 2023, there was no allowance for credit loss related to the available-for-sale securities portfolio[35] - Non-accrual loans decreased significantly from $4.9 million at year-end 2022 to $61,000 at September 30, 2023[81] - Total uninsured deposits were $429.7 million, of which $85.7 million were collateralized public funds, leaving net uninsured deposits at $344.0 million (23.1% of total deposits)[105] - In May 2023, the company entered into a $150.0 million pay-fixed/receive-floating interest rate swap to hedge the fair value risk of its fixed-rate loan portfolio[111] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the $2.2 million Q3 net income decline, attributing it to net interest margin compression and a strategic securities sale, alongside strong loan growth and improved asset quality Comparison of Results of Operations Q3 2023 net income declined to $1.8 million from $4.0 million in Q3 2022, primarily due to reduced net interest income and a $1.2 million loss on securities sales - Q3 2023 net income declined by $2.2 million YoY, primarily due to a $691,000 drop in net interest income, a $456,000 increase in provision for credit losses, an $809,000 fall in non-interest income, and an $856,000 increase in non-interest expense[134] - The Q3 net interest margin decreased by 31 basis points to 2.95% YoY, as the cost of funds increased more rapidly than the yield on earning assets[137] - A strategic sale of $39.9 million in U.S. Treasuries during Q3 2023 resulted in a one-time pre-tax loss of $1.2 million, aimed at improving future liquidity and net interest margin[138][189] - For the nine months ended Sep 30, 2023, net income declined by $2.0 million YoY, as increased non-interest expense and credit provisions, along with lower non-interest income, outweighed a $2.0 million increase in net interest income[160] Financial Position Total assets grew to $1.8 billion and loans to $1.1 billion by September 30, 2023, funded by increased deposits and FHLB advances - Assets increased by $120.8 million (9.7% annualized) to $1.8 billion at September 30, 2023[201] - Loans (excluding HFS) grew by $110.3 million (15.2% annualized) to $1.1 billion[201] - Deposits increased by $106.6 million (10.3% annualized) to $1.5 billion[215] - Shareholders' equity increased by $5.2 million to $123.6 million, impacted by net income of $8.5 million, dividends of $3.2 million, and a $671,000 increase in accumulated other comprehensive loss[223] Provision and Allowance for Credit Losses The company recorded a $730,000 provision for credit losses, while asset quality significantly improved with non-accrual loans decreasing to $61,000 - The provision for credit losses for the nine months ended Sep 30, 2023 was $730,000, compared to a release of $177,000 in the prior year period[161][162] - The non-performing asset ratio improved significantly to 0.04% at Sep 30, 2023, down from 0.35% at Dec 31, 2022[181] - Non-accrual loans declined to $61,000 at Sep 30, 2023 from $4.9 million at Dec 31, 2022, primarily due to the successful resolution of several large non-accrual relationships[181] Allowance for Credit Losses - Loans (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Allowance for Credit Losses | $11,818 | $11,336 | | % of Total Loans | 1.08% | 1.16% | | % of Non-performing Loans | 18,465.63% | 230.68% | Market Risk Management The company is short-term liability-sensitive to interest rate changes, with a 2.63% projected decrease in net interest income for a +100 bp rate shock - The company is liability sensitive in the short term (12 months), with a modeled 2.63% decrease in net interest income for a +100 bp rate shock as of September 30, 2023[227][228] - The company is asset sensitive based on the longer-term Present Value of Equity (PVE) measure, though PVE is projected to decline by 1.40% in a -100 bp rate shock scenario[229][230] - The company entered into a $150.0 million Pay-Fixed Swap Agreement on May 5, 2023, to partially offset its liability sensitivity[227] Liquidity and Capital Resources The company maintains strong liquidity with over $450.1 million in credit lines and remains well-capitalized, despite slight decreases in capital ratios due to asset growth - The company has total remaining credit availability of over $450.1 million, primarily from the FHLB and federal funds lines[234] - Unused credit commitments to customers totaled $221.9 million at September 30, 2023[235] Bank Regulatory Capital Ratios | Capital Ratio | Sep 30, 2023 | Dec 31, 2022 | Well-Capitalized Minimum | | :--- | :--- | :--- | :--- | | Leverage Ratio | 8.63% | 8.63% | 5.00% | | Common Equity Tier 1 | 12.47% | 13.49% | 6.50% | | Tier 1 Capital | 12.47% | 13.49% | 8.00% | | Total Capital | 13.50% | 14.54% | 10.00% | - A cash dividend of $0.14 per common share was approved for Q3 2023[244] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as per the report - The report states this item is not applicable[246] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[247] - No material changes to internal control over financial reporting occurred during the quarter[249] PART II – OTHER INFORMATION Legal Proceedings Management is not aware of any pending legal proceedings that would materially impact the company's financial condition or results - Management does not believe any pending legal proceedings would have a material adverse impact on the company's financial position, results of operations, or cash flows[252] Risk Factors A new risk factor highlights the potential instability and cost of brokered deposits, which totaled $48.2 million as of September 30, 2023 - A new risk factor was added regarding the use of brokered deposits, which may be an unstable and/or expensive funding source[255] - The company held $48.2 million in brokered deposits as of September 30, 2023, representing 3.2% of total deposits[257] - The ability to accept, renew, or roll over brokered deposits is dependent on maintaining a "well capitalized" status, and limitations could adversely impact funding costs and liquidity[258] Unregistered Sales of Equity Securities and Use of Proceeds The company credited 1,979 deferred stock units to directors in Q3 2023, with no share repurchases made under the current plan - In Q3 2023, an aggregate of 1,979 deferred stock units were credited to directors who elected to defer fees[263] - No share repurchases were made during Q3 2023. The current repurchase plan for up to 375,000 shares expires on December 31, 2023[263] Exhibits This section lists exhibits filed with the quarterly report, including officer certifications and iXBRL financial statements