First munity (FCCO) - 2023 Q4 - Annual Report

PART I Business First Community Corporation is a bank holding company providing commercial and retail banking services in South Carolina and Georgia Company Financial Snapshot (as of December 31, 2023) | Metric | Amount (in billions) | | :--- | :--- | | Total Assets | $1.8 | | Total Loans | $1.1 | | Total Deposits | $1.5 | | Shareholders' Equity | $0.1311 | - The company operates 22 full-service offices across the Midlands, Upstate, and Piedmont regions of South Carolina, as well as the Central Savannah River Area (CSRA) including Augusta, Georgia[29][34] - The company offers a wide range of traditional banking products, including commercial and consumer loans, mortgage services, deposit accounts, brokerage, and investment services[30][38][39] - As of December 31, 2023, the company employed 268 full-time, 14 part-time, and five seasonal/on-call employees[44] Supervision and Regulation The company and its bank are subject to extensive state and federal banking regulations, including capital and anti-money laundering rules - The Bank is subject to Basel III capital rules, requiring minimum ratios for Common Equity Tier 1 (4.5%), Tier 1 (6.0%), and Total capital (8.0%), plus a 2.5% capital conservation buffer[61][63][68] - The Bank is subject to the Community Reinvestment Act (CRA), which requires meeting the credit needs of its community, including low- and moderate-income neighborhoods, and received a "satisfactory" rating in its most recent CRA examination[110] - The Bank's non-owner-occupied commercial real estate loans were approximately 313% of total risk-based capital as of December 31, 2023, exceeding the 300% supervisory threshold in the CRE Guidance, which may warrant greater supervisory scrutiny[156] - The Company and Bank must comply with anti-money laundering (AML) programs under the Bank Secrecy Act (BSA) and the USA PATRIOT Act, which include requirements for customer identification, suspicious activity reporting, and enhanced due diligence[125][127] Risk Factors The company faces risks from economic conditions, credit losses, interest rate changes, operational failures, and regulations - The business is highly dependent on economic conditions in its primary markets of South Carolina and Georgia, where a downturn could deteriorate credit quality and reduce demand for its products[160][161] - A significant concentration of credit exposure exists in commercial real estate, which comprised approximately 78.5% of total loans as of December 31, 2023, posing a risk if this market experiences a downturn[167] - Changes in prevailing interest rates can significantly impact net interest income, with the Federal Reserve's monetary policies directly affecting profitability[178][188] - Operational risks include system failures and cybersecurity attacks, where a breach could lead to disclosure of confidential information, reputational damage, and financial losses[209][212] - The company operates in a highly regulated industry, and changes in laws, accounting standards, or regulatory policies could restrict activities and impose significant compliance costs[219][220] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - Not applicable[247] Cybersecurity The company's cybersecurity program, based on NIST, is overseen by the Information Security Officer and board - The cybersecurity program is overseen by the Information Security Officer, who reports to the Chief Operations/Chief Risk Officer and periodically to the Audit & Compliance Committee of the board of directors[248][254][255] - The information security program is designed around the National Institute of Standards and Technology (NIST) Cybersecurity Framework and utilizes a layered, defensive strategy[249][250] - An Incident Response Program is in place to provide a framework for responding to cybersecurity incidents, including escalation to executive officers and the board[251] - To date, cybersecurity threats have not had a material effect on the company[252] Properties The company operates 22 full-service offices across South Carolina and Georgia, mostly owned - The company operates 22 full-service offices in South Carolina and Georgia, with most properties owned, except for three leased full-service branch offices[257] - The company intends to close one office in downtown Augusta, Georgia on June 27, 2024[257] Legal Proceedings The company reports that it is not a party to any pending or threatened legal proceedings that would have a material effect - In the ordinary course of operations, the company may be a party to various legal proceedings, but none are currently believed to have a material effect[258] Mine Safety Disclosures This item is not applicable to the company - Not applicable[259] PART II Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, paid quarterly dividends, and had an expired stock repurchase plan Quarterly Common Stock Dividends per Share | Year | Q1 | Q2 | Q3 | Q4 | | :--- | :--- | :--- | :--- | :--- | | 2023 | $0.14 | $0.14 | $0.14 | $0.14 | | 2022 | $0.13 | $0.13 | $0.13 | $0.13 | - The company's ability to pay dividends is dependent on the Bank's ability to pay dividends to the holding company, which is subject to regulatory restrictions, including maintaining a capital conservation buffer[264][265] - A stock repurchase plan approved in April 2022 for up to 375,000 shares expired on December 31, 2023, with no repurchases made under the plan[267] Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased in 2023 due to lower non-interest income and higher expenses, with CECL adoption impacting results Key Performance Indicators | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income (in millions) | $11.8 | $14.6 | | Diluted EPS | $1.55 | $1.92 | | Return on Average Assets | 0.68% | 0.88% | | Return on Average Common Equity | 9.59% | 11.99% | | Net Interest Margin (tax equivalent) | 3.01% | 3.14% | - The decline in 2023 net income was primarily driven by lower non-interest income, higher non-interest expenses, and an increased provision for credit losses[293] - Total assets increased by $154.7 million (9.2%) to $1.8 billion at year-end 2023, mainly due to a $153.2 million (15.6%) increase in loans[369] - The company adopted the CECL accounting standard for credit losses on January 1, 2023, resulting in a day-one adjustment that decreased retained earnings by $337 thousand[277][325] Results of Operations Net income decreased to $11.8 million in 2023, primarily due to lower non-interest income and higher expenses Comparison of Results of Operations (2023 vs. 2022) | Item (in thousands) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $48,892 | $47,943 | +$949 | | Provision for Credit Losses | $1,129 | ($152) | +$1,281 | | Non-interest Income | $10,421 | $11,569 | -$1,148 | | Non-interest Expense | $43,144 | $41,253 | +$1,891 | | Net Income | $11,843 | $14,613 | -$2,770 | - The increase in provision for credit losses in 2023 was mainly due to significant loan growth and an increase in unfunded commitments[294] - The decline in non-interest income was driven by a $1.2 million loss on the sale of securities and a $494 thousand decrease in mortgage banking income[295] - The rise in non-interest expense was attributed to higher costs in salaries, equipment, marketing, and FDIC insurance assessments[295] Net Interest Income Net interest income increased to $48.9 million in 2023, but net interest margin compressed due to rising funding costs Net Interest Income and Margin Analysis | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income (in thousands) | $48,892 | $47,943 | | Average Earning Assets (in thousands) | $1,632,111 | $1,541,381 | | Yield on Earning Assets | 4.45% | 3.32% | | Cost of Interest-Bearing Liabilities | 2.06% | 0.30% | | Net Interest Margin (tax equivalent) | 3.01% | 3.14% | - The increase in net interest income was primarily driven by a $90.7 million increase in average earning assets, led by a $127.7 million increase in average loans[300][301] - A $150.0 million pay-fixed/receive-floating interest rate swap, effective May 5, 2023, positively impacted loan yields by 16 basis points and the net interest margin by 10 basis points for the year[303] Provision and Allowance for Credit Losses Following CECL adoption, credit loss provision increased, ACL grew, and non-performing assets decreased Allowance for Credit Losses (ACL) on Loans | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | ACL on Loans (in thousands) | $12,267 | $11,336 | | ACL as % of Total Loans | 1.08% | 1.16% | | Provision for (Release of) Credit Losses (in thousands) | $1,129 | ($152) | - Non-performing assets decreased to $864 thousand (0.05% of total assets) at year-end 2023 from $5.8 million (0.35% of total assets) at year-end 2022[330] - The decrease in non-performing assets was mainly due to the successful resolution of two customer relationships with non-accrual loans, including one large $3.9 million relationship resolved through foreclosure and sale of the property[330] Non-interest Income and Expense Non-interest income decreased due to securities sales loss, while non-interest expense increased Non-interest Income & Expense Summary (in thousands) | Category | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Non-interest Income | $10,421 | $11,569 | ($1,148) | | Mortgage Banking Income | $1,406 | $1,900 | ($494) | | Loss on Sale of Securities | ($1,249) | $0 | ($1,249) | | Non-interest Expense | $43,144 | $41,253 | $1,891 | | Salaries and Employee Benefits | $25,864 | $25,357 | $507 | | FDIC Insurance Assessments | $904 | $468 | $436 | - A one-time pre-tax loss of $1.2 million was recognized in Q3 2023 from the sale of $39.9 million of U.S. Treasuries to improve liquidity and future net interest margin[349] - Mortgage banking income declined due to a higher interest rate environment and low housing inventory, which reduced secondary market production from $65.8 million in 2022 to $49.7 million in 2023[350] Financial Position Total assets grew to $1.83 billion in 2023, driven by loan growth funded by increased deposits Balance Sheet Highlights (as of Dec 31) | (in millions) | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $1,827.7 | $1,672.9 | +9.2% | | Net Loans | $1,121.8 | $969.5 | +15.7% | | Investment Securities | $506.2 | $564.8 | -10.4% | | Total Deposits | $1,511.0 | $1,385.4 | +9.1% | - The loan portfolio's growth was driven by increases across all major categories, with commercial mortgage loans remaining the largest component at 69.8% of the total portfolio[373] - The investment securities portfolio decreased mainly due to a sale of $39.9 million in U.S. Treasuries and normal principal cash flows[378] Capital Adequacy and Dividend Policy Shareholders' equity increased to $131.1 million, and the Bank remained well-capitalized Bank Regulatory Capital Ratios (as of Dec 31, 2023) | Ratio | Actual | Required (Well Capitalized) | | :--- | :--- | :--- | | Tier 1 Risk-Based Capital | 12.53% | > 8.0% | | Total Risk-Based Capital | 13.58% | > 10.0% | | CET1 Capital | 12.53% | > 6.5% | | Tier 1 Leverage | 8.45% | > 5.0% | - The increase in shareholders' equity was driven by $11.8 million in net income, partially offset by $4.2 million in dividends, with a $4.2 million improvement in accumulated other comprehensive loss also contributing[399] - The quarterly dividend was increased to $0.14 per share in 2023, resulting in a total annual dividend of $0.56 per share[401] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, with an unqualified auditor's opinion - The independent auditor, Elliott Davis, LLC, issued an unqualified opinion on the consolidated financial statements[428] - The auditor identified the Allowance for Credit Losses as a critical audit matter due to the high degree of subjectivity and judgment involved, especially with the adoption of the new CECL standard (ASC 326) on January 1, 2023[433][436] Consolidated Balance Sheets Total assets increased to $1.83 billion in 2023, driven by loan growth, with increased liabilities and equity Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,827,688 | $1,672,946 | | Net Loans Held-for-Investment | $1,121,752 | $969,521 | | Investment Securities (AFS & HTM) | $499,396 | $560,563 | | Total Liabilities | $1,696,629 | $1,554,585 | | Total Deposits | $1,511,001 | $1,385,382 | | Total Shareholders' Equity | $131,059 | $118,361 | Consolidated Statements of Income Net income decreased to $11.8 million in 2023, primarily due to higher credit loss provision and expenses Consolidated Income Statement Summary (in thousands) | Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income | $48,892 | $47,943 | $45,279 | | Provision for (Release of) Credit Losses | $1,129 | ($152) | $335 | | Non-interest Income | $10,421 | $11,569 | $13,904 | | Non-interest Expense | $43,144 | $41,253 | $39,201 | | Net Income | $11,843 | $14,613 | $15,465 | | Diluted EPS | $1.55 | $1.92 | $2.05 | Notes to Consolidated Financial Statements The notes detail accounting policies, CECL adoption, portfolio composition, and capital adequacy - The company adopted the CECL methodology (ASU 2016-13) on January 1, 2023, replacing the incurred loss model with an expected loss model for financial assets, resulting in a net decrease to retained earnings of $337,400[477][478] - The loan portfolio's largest concentration is in commercial mortgage loans, which totaled $791.9 million (69.8% of total gross loans) as of December 31, 2023[373][528] - The Bank's regulatory capital ratios at December 31, 2023, were all above the levels required to be considered "well capitalized," with a Total Risk-Based Capital ratio of 13.6%[628] - The company has four reportable segments: Commercial and retail banking, Mortgage Banking, Investment advisory and non-deposit, and Corporate, with the Commercial and Retail Banking segment generating the majority of net income in 2023[642][644] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of December 31, 2023[646] - Management assessed internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2023[648] - No material changes were made to internal controls over financial reporting during the most recent fiscal quarter[649] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 proxy statement - The information required for this item is incorporated by reference from the company's 2024 proxy statement[654] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - The information required for this item is incorporated by reference from the company's 2024 proxy statement[656] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information on security ownership is incorporated by reference from the 2024 proxy statement, with no outstanding options reported - The information required for this item is incorporated by reference from the company's 2024 proxy statement[658] - There were no outstanding options as of December 31, 2023[657] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - The information required for this item is incorporated by reference from the company's 2024 proxy statement[659] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - The information required for this item is incorporated by reference from the company's 2024 proxy statement[660] PART IV Exhibits, Financial Statement Schedules This section lists financial statements from Item 8 and exhibits filed with the Form 10-K - This section contains a list of all financial statements filed with the report, which are located in Item 8[662] - An index of exhibits filed with the Form 10-K is provided, including governance documents, material contracts, certifications, and XBRL data files[664][667]