First Community Corporation Announces Second Quarter Results and Cash Dividend
First Community Corporation Announces Second Quarter Results and Cash Dividend
PR Newswire
LEXINGTON, S.C., July 20, 2022
Highlights for Second Quarter of 2022
Net income of $3.1 million.Diluted EPS of $0.41 per common share for the quarter and $0….
First Community Corporation Announces Second Quarter Results and Cash Dividend
PR Newswire
LEXINGTON, S.C., July 20, 2022
Highlights for Second Quarter of 2022
- Net income of $3.1 million.
- Diluted EPS of $0.41 per common share for the quarter and $0.87 year-to-date through June 30, 2022.
- Total loans increased during the second quarter by $40.5 million, an annualized growth rate of 18.6% on a linked quarter basis.
- Pure (non-CD) deposit growth, including customer cash management accounts, of $46.2 million, an annualized growth rate of 13.4% on a linked quarter basis.
- Investment advisory line of business revenue of $1.2 million.
- Cash dividend of $0.13 per common share, which is the 82nd consecutive quarter of cash dividends paid to common shareholders.
LEXINGTON, S.C., July 20, 2022 /PRNewswire/ -- Today, First Community Corporation (Nasdaq: FCCO), the holding company for First Community Bank, reported net income for the second quarter of 2022 of $3.130 million as compared to $3.543 million in the second quarter of 2021 and $3.489 million in the first quarter of 2022. Diluted earnings per common share were $0.41 for the second quarter of 2022 as compared to $0.47 for the second quarter of 2021 and $0.46 in the first quarter of 2022. As a note, during the second quarter of 2021, the bank recognized $611 thousand in non-recurring PPP related fee income compared to $1 thousand in the second quarter of 2022.
Year-to-date through June 30, 2022, net income was $6.619 million compared to $6.798 million during the first six months of 2021. Diluted earnings per share for the first half of 2022 were $0.87, compared to $0.90 during the same time period in 2021. As a note, during the first six months of 2021, the bank recognized $1.153 million in non-recurring PPP related fee income compared to $44 thousand in the first six months of 2022.
Cash Dividend and Capital
The Board of Directors approved a cash dividend for the second quarter of 2022. The company will pay a $0.13 per share dividend to holders of the company's common stock. This dividend is payable August 16, 2022 to shareholders of record as of August 2, 2022. First Community President and CEO Mike Crapps commented, "Our entire board is pleased that our performance enables the company to continue its cash dividend for the 82nd consecutive quarter."
As previously announced, the Company's Board of Directors has approved a share repurchase plan that provides for the repurchase of up to 375,000 shares of its common stock, which represents approximately 5% of the Company's 7,566,633 shares outstanding as of June 30, 2022. Under the repurchase plan, the Company may repurchase shares from time to time. No shares have been repurchased under this plan.
Each of the regulatory capital ratios for the bank exceed the well capitalized minimum levels currently required by regulatory statute. At June 30, 2022, the bank's regulatory capital ratios (Leverage, Tier I Risk Based and Total Risk Based) were 8.34%, 13.47%, and 14.57%, respectively. This compares to the same ratios as of June 30, 2021 of 8.48%, 13.52%, and 14.66%, respectively. As of June 30, 2022, the bank's Common Equity Tier I ratio was 13.47% compared to 13.52% at June 30, 2021. The Company's Tangible Common Equity to Tangible Assets ratio (TCE ratio) was 6.12% at June 30, 2022, compared to 6.71% at March 31, 2022. This is primarily due to growth in the Company's balance sheet and an increase in the Accumulated Other Comprehensive Loss (AOCL) which has a temporary negative impact on the fair value of our investments and capital. Excluding this, the Company's TCE ratio was 7.59% and the Tangible Book Value per share was $17.00 at June 30, 2022. During the quarter, the Company reclassified $224.6 million in investments to Held-to-Maturity (HTM) from Available-for-Sale (AFS). With the addition of other purchased investments during the second quarter, the HTM portfolio was $233.7 million at June 30, 2022. The remaining AFS portfolio has a modified duration of 2.84.
Asset Quality
The non-performing assets ratio as of June 30, 2022 was 0.58% and the total past dues ratio was 0.24%. Troubled debt restructuring (TDRs) still accruing interest were reduced to $125 thousand at June 30, 2022. Non-accrual loans increased $4.2 million during the quarter to $4.4 million at June 30, 2022, the result of one large loan relationship representing almost the entire increase amount that was moved to non-accrual status. Next steps have been taken on this well collateralized loan to move this toward a successful resolution. Net loan recoveries for the quarter were $242 thousand and year-to-date through June 30, 2022 were $261 thousand. The ratio of classified loans plus OREO now stands at 5.12% of total bank regulatory risk-based capital as of June 30, 2022.
Balance Sheet
Total loans increased during the second quarter by $40.5 million, which is an annualized growth rate of 18.6%. Commercial loan production was $80.3 million during the second quarter compared to $55.3 million in the first quarter of 2022. While there are likely some headwinds related to potential loan payoffs and paydowns, momentum going into the third quarter of the year remains strong.
Total deposits were $1.469 billion at June 30, 2022 compared to $1.431 billion at March 31, 2022. Pure deposits, which are defined as total deposits less certificates of deposits and including customer cash management accounts, increased $46.2 million, an annualized growth rate of 13.4%, to $1.421 billion at June 30, 2022 from $1.375 billion at March 31, 2022. Cost of deposits decreased on a linked quarter basis to 0.09% in the second quarter of 2022 from 0.10% in the first quarter of the year. Cost of funds also decreased on a linked quarter basis to 0.12% in the second quarter of 2022 from 0.13% in the first quarter of the year.
First Community President and CEO Mike Crapps commented, "We are extremely excited about the success in the growth of our loan portfolio during the second quarter. This is reflective of the hard work of our team and the high quality of our customers and markets. Additionally, our success in gathering low cost deposits continues to be a strength for our company. We expect this trend of declining cost of deposits and cost of funds to reverse given the current interest rate environment."
Revenue
Net Interest Income/Net Interest Margin
Net interest income was $11.051 million for the second quarter of 2022 compared to first quarter net interest income of $10.733 million and $11.092 million for the second quarter of 2021. Second quarter net interest margin, on a tax equivalent basis, was 2.93% compared to 2.91% in the first quarter of the year.
During the quarter, there were two events that negatively impacted net interest income and net interest margin. Interest income on variable rate collateralized mortgage obligations, primarily consisting of GNMA home equity conversion mortgages, declined $284 thousand to ($202) thousand during the second quarter of 2022, from $82 thousand during the first quarter of 2022. This decline, which caused a 20 basis points reduction in the yield on investments and a seven basis points reduction in net interest margin during the second quarter of 2022, was due to an increase in prepayments, which resulted in accelerated amortization of the premium on these investments. Also during the second quarter of 2022, a $4.1 million loan was moved to non-accrual status, which resulted in a $51 thousand reversal to interest income, a two basis points reduction to the yield on loans, and a one basis point reduction to net interest margin.
Non-Interest Income
Non-interest income in the second quarter of 2022 was $3.009 million, compared to $3.374 million in the first quarter of 2022 and $3.418 million in the second quarter of 2021. Revenues in the mortgage line of business were $481 thousand in the second quarter of 2022, compared to $839 thousand in the first quarter of 2022 and $1.143 million in the second quarter of 2021. Revenue in the investment advisory line of business were $1.195 million in the second quarter of 2022, basically flat on a linked quarter and up 24.9% from $957 thousand in the second quarter of 2021. Assets under management (AUM) were $524.3 million at June 30, 2022 from $632.8 million at March 31, 2022 and $650.9 million at December 31, 2021. Mr. Crapps commented, "Revenue in the mortgage line of business has been impacted by the headwinds of rising mortgage rates and low housing inventory. To help offset this impact, during the second quarter, our bank began to market an Adjustable Rate Mortgage (ARM) loan product to provide borrowers with an alternative to fixed rate mortgage loans. As these loans are being held on our balance sheet, the result is additive to loan growth but results in less gain-on-sale fee revenue. While revenue in our financial planning and investment advisory line of business remained constant on a linked quarter, we have seen AUM affected by the stock market performance in the first six months of the year."
Non-Interest Expense
Non-interest expense was $10.188 million in the second quarter of 2022, compared to $9.954 million in the first quarter of the year. Expenses in the Occupancy and Marketing/Public Relations were up $81 thousand and $85 thousand respectively. The increase in Occupancy expense was related to some major maintenance projects competed during the quarter. Marketing/Public Relations expense was up due to larger media schedules in the second quarter including activity in the bank's new York County, SC market. Salaries and benefits increased $56 thousand on a linked quarter due to the full quarter impact of the new York County, SC loan production team and annual increases for exempt employees which were effective on March 1, 2022, which were partially offset by lower mortgage loan commissions and higher vacancy rates 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 services, residential mortgage lending and financial planning/investment advisory services for businesses and consumers. First Community serves customers in the Midlands, Aiken, Upstate and Piedmont Regions of South Carolina as well as Augusta, Georgia. For more information, visit www.firstcommunitysc.com.
FORWARD-LOOKING STATEMENTS
This news release and certain statements by our management may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to future plans, goals, projections and expectations, and are thus prospective. Forward looking statements can be identified by words such as "anticipate", "expects", "intends", "believes", "may", "likely", "will", "plans" or other statements that indicate future periods. Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors, include, among others, the following: (1) competitive pressures among depository and other financial institutions may increase significantly and have an effect on pricing, spending, third-party relationships and revenues; (2) the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected including, but not limited to, due to the negative impacts and disruptions resulting from the outbreak of the novel coronavirus, or COVID-19, on the economies and communities we serve, which has had and may continue to have an adverse impact on our business, operations, and performance, and could continue to have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole both domestically and globally; (3) the rate of delinquencies and amounts of charge-offs, the level of allowance for loan loss, the rates of loan growth, or adverse changes in asset quality in our loan portfolio, which may result in increased credit risk-related losses and expenses; (4) changes in legislation, regulation, policies or administrative practices, whether by judicial, governmental, or legislative action, (5) adverse conditions in the stock market, the public debt markets and other capital markets (including changes in interest rate conditions) could continue to have a negative impact on the company; (6) technology and cybersecurity risks, including potential business disruptions, reputational risks, and financial losses, associated with potential attacks on or failures by our computer systems and computer systems of our vendors and other third parties; and (7) risks, uncertainties and other factors disclosed in our most recent Annual Report on Form 10-K filed with the SEC, or in any of our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K filed with the SEC since the end of the fiscal year covered by our most recently filed Annual Report on Form 10-K, which are available at the SEC's Internet site (http://www.sec.gov).
Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. We can give no assurance that the results contemplated in the forward-looking statements will be realized. The inclusion of this forward-looking information should not be construed as a representation by our company or any person that the future events, plans, or expectations contemplated by our company will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
FIRST COMMUNITY CORPORATION | ||||||
BALANCE SHEET DATA | ||||||
(Dollars in thousands, except per share data) | ||||||
As of | ||||||
June 30, | March 31, | December 31, | September 30, | June 30, | ||
2022 | 2022 | 2021 | 2021 | 2021 | ||
Total Assets | $1,684,824 | $1,652,279 | $ 1,584,508 | $ 1,560,326 | $1,514,973 | |
Other Short-term Investments and CD's1 | 76,918 | 68,169 | 47,049 | 55,259 | 52,316 | |
Investment Securities | ||||||
Investments Held-to-Maturity | 233,730 | - | - | - | - | |
Investments Available-for-Sale | 337,254 | 577,820 | 564,839 | 513,500 | 468,951 | |
Other Investments at Cost | 1,929 | 1,879 | 1,785 | 1,760 | 1,718 | |
Total Investment Securities | 572,913 | 579,699 | 566,624 | 515,260 | 470,669 | |
Loans Held for Sale | 4,533 | 12,095 | 7,120 | 6,213 | 11,416 | |
Loans | ||||||
Paycheck Protection Program (PPP) Loans | 250 | 269 | 1,467 | 9,109 | 47,229 | |
Non-PPP Loans | 916,082 | 875,528 | 862,235 | 872,411 | 831,089 | |
Total Loans | 916,332 | 875,797 | 863,702 | 881,520 | 878,318 | |
Allowance for Loan Losses | 11,220 | 11,063 | 11,179 | 11,025 | 10,638 | |
Goodwill | 14,637 | 14,637 | 14,637 | 14,637 | 14,637 | |
Other Intangibles | 840 | 879 | 919 | 959 | 1,011 | |
Total Deposits | 1,468,975 | 1,430,748 | 1,361,291 | 1,333,568 | 1,289,883 | |
Securities Sold Under Agreements to Repurchase | 71,800 | 68,060 | 54,216 | 59,821 | 60,487 | |
Federal Home Loan Bank Advances | - | - | - | - | - | |
Junior Subordinated Debt | 14,964 | 14,964 | 14,964 | 14,964 | 14,964 | |
Shareholders' Equity | 117,592 | 125,380 | 140,998 | 139,113 | 137,927 | |
Book Value Per Common Share | $ 15.54 | $ 16.59 | $ 18.68 | $ 18.44 | $ 18.29 | |
Tangible Book Value Per Common Share | $ 13.50 | $ 14.53 | $ 16.62 | $ 16.37 | $ 16.22 | |
Tangible Book Value Per Common Share excluding Accumulated Other | $ 17.00 | $ 16.52 | $ 16.18 | $ 15.76 | $ 15.23 | |
Comprehensive Income (Loss) | ||||||
Equity to Assets | 6.98 % | 7.59 % | 8.90 % | 8.92 % | 9.10 % | |
Tangible Common Equity to Tangible Assets (TCE Ratio) | 6.12 % | 6.71 % | 8.00 % | 8.00 % | 8.16 % | |
TCE Ratio excluding Accumulated Other Comprehensive Income (Loss) | 7.59 % | 7.56 % | 7.80 % | 7.72 % | 7.70 % | |
Loan to Deposit Ratio (Includes Loans Held for Sale) | 62.69 % | 62.06 % | 63.97 % | 66.57 % | 68.98 % | |
Loan to Deposit Ratio (Excludes Loans Held for Sale) | 62.38 % | 61.21 % | 63.45 % | 66.10 % | 68.09 % | |
Allowance for Loan Losses/Loans | 1.22 % | 1.26 % | 1.29 % | 1.25 % | 1.21 % | |
Regulatory Capital Ratios (Bank): | ||||||
Leverage Ratio | 8.34 % | 8.43 % | 8.45 % | 8.56 % | 8.48 % | |
Tier 1 Capital Ratio | 13.47 % | 13.89 % | 13.97 % | 13.58 % | 13.52 % | |
Total Capital Ratio | 14.57 % | 15.03 % | 15.15 % | 14.74 % | 14.66 % | |
Common Equity Tier 1 Capital Ratio | 13.47 % | 13.89 % | 13.97 % | 13.58 % | 13.52 % | |
Tier 1 Regulatory Capital | $ 137,910 | $ 135,555 | $ 132,918 | $ 129,741 | $ 125,732 | |
Total Regulatory Capital | $ 149,130 | $ 146,618 | $ 144,097 | $ 140,766 | $ 136,370 | |
Common Equity Tier 1 Capital | $ 137,910 | $ 135,555 | $ 132,918 | $ 129,741 | $ 125,732 | |
1 Includes federal funds sold and interest-bearing deposits | ||||||
Average Balances: | Three months ended | Six months ended | ||||
June 30, | June 30, | |||||
2022 | 2021 | 2022 | 2021 | |||
Average Total Assets | $1,643,908 | $1,507,708 | $ 1,633,146 | $1,471,684 | ||
Average Loans (Includes Loans Held for Sale) | 896,619 | 895,612 | 886,540 | 891,021 | ||
Average Investment Securities | 560,417 | 430,865 | 566,092 | 402,261 | ||
Average Short-term Investments and CDs | 72,816 | 77,759 | 70,020 | 78,543 | ||
Average Earning Assets | 1,529,852 | 1,404,236 | 1,522,652 | 1,371,825 | ||
Average Deposits | 1,427,975 | 1,285,101 | 1,401,540 | 1,246,804 | ||
Average Other Borrowings | 87,084 | 75,434 | 92,272 | 76,842 | ||
Average Shareholders' Equity | 116,067 | 135,223 | 126,598 | 135,401 | ||
Asset Quality: | As of | |||||
June 30, | March 31, | December 31, | September 30, | June 30, | ||
2022 | 2022 | 2021 | 2021 | 2021 | ||
Loan Risk Rating by Category (End of Period) | ||||||
Special Mention | $ 684 | $ 1,668 | $ 1,626 | $ 2,851 | $ 3,085 | |
Substandard | 6,710 | 7,849 | 7,872 | 7,992 | 11,707 | |
Doubtful | - | - | - | - | - | |
Pass | 908,938 | 866,280 | 854,204 | 870,677 | 863,526 | |
$ 916,332 | $ 875,797 | $ 863,702 | $ 881,520 | $ 878,318 | ||
Nonperforming Assets | ||||||
Non-accrual Loans | $ 4,351 | $ 148 | $ 250 | $ 359 | $ 3,986 | |
Other Real Estate Owned and Repossessed Assets | 984 | 1,146 | 1,165 | 1,165 | 1,182 | |
Accruing Loans Past Due 90 Days or More | - | 174 | - | - | 4,165 | |
Total Nonperforming Assets | $ 5,335 | $ 1,468 | $ 1,415 | $ 1,524 | $ 9,333 | |
Accruing Trouble Debt Restructurings | $ 125 | $ 1,393 | $ 1,444 | $ 1,474 | $ 1,510 | |
Three months ended | Six months ended | |||||
June 30, | June 30, | |||||
2022 | 2021 | 2022 | 2021 | |||
Loans Charged-off | $ 2 | $ 111 | $ 3 | $ 127 | ||
Overdrafts Charged-off | 16 | 10 | 30 | 19 | ||
Loan Recoveries | (244) | (24) | (264) | (32) | ||
Overdraft Recoveries | (1) | (4) | (5) | (19) | ||
Net Charge-offs (Recoveries) | $ (227) | $ 93 | $ (236) | $ 95 | ||
Net Charge-offs / (Recoveries) to Average Loans2 | (0.10 %) | 0.04 % | (0.05 %) | 0.02 % | ||
2 Annualized |
FIRST COMMUNITY CORPORATION | ||||||||||
INCOME STATEMENT DATA | ||||||||||
(Dollars in thousands, except per share data) | ||||||||||
Three months ended | Three months ended | Six months ended | ||||||||
June 30, | March 31, | June 30, | ||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||
Interest income | $ 11,513 | $ 11,664 | $ 11,195 | $ 11,218 | $ 22,708 | $ 22,882 | ||||
Interest expense | 462 | 572 | 462 | 651 | 924 | 1,223 | ||||
Net interest income | 11,051 | 11,092 | 10,733 | 10,567 | 21,784 | 21,659 | ||||
Provision for (release of) loan losses | (70) | 168 | (125) | 177 | (195) | 345 | ||||
Net interest income after provision | 11,121 | 10,924 | 10,858 | 10,390 | 21,979 | 21,314 | ||||
Non-interest income | ||||||||||
Deposit service charges | 262 | 212 | 265 | 246 | 527 | 458 | ||||
Mortgage banking income | 481 | 1,143 | 839 | 990 | 1,320 | 2,133 | ||||
Investment advisory fees and non-deposit commissions | 1,195 | 957 | 1,198 | 877 | 2,393 | 1,834 | ||||
Gain (loss) on sale of other assets | (45) | - | - | 77 | (45) | 77 | ||||
Other non-recurring income | 5 | - | 4 | 100 | 9 | 100 | ||||
Other | 1,111 | 1,106 | 1,068 | 1,006 | 2,179 | 2,112 | ||||
Total non-interest income | 3,009 | 3,418 | 3,374 | 3,296 | 6,383 | 6,714 | ||||
Non-interest expense | ||||||||||
Salaries and employee benefits | 6,175 | 5,948 | 6,119 | 5,964 | 12,294 | 11,912 | ||||
Occupancy | 786 | 734 | 705 | 730 | 1,491 | 1,464 | ||||
Equipment | 329 | 338 | 332 | 275 | 661 | 613 | ||||
Marketing and public relations | 446 | 313 | 361 | 396 | 807 | 709 | ||||
FDIC assessment | 105 | 146 | 130 | 169 | 235 | 315 | ||||
Other real estate expenses | 29 | 55 | 47 | 29 | 76 | 84 | ||||
Amortization of intangibles | 40 | 52 | 39 | 57 | 79 | 109 | ||||
Other | 2,278 | 2,292 | 2,221 | 1,920 | 4,499 | 4,212 | ||||
Total non-interest expense | 10,188 | 9,878 | 9,954 | 9,540 | 20,142 | 19,418 | ||||
Income before taxes | 3,942 | 4,464 | 4,278 | 4,146 | 8,220 | 8,610 | ||||
Income tax expense | 812 | 921 | 789 | 891 | 1,601 | 1,812 | ||||
Net income | $ 3,130 | $ 3,543 | $ 3,489 | $ 3,255 | $ 6,619 | $ 6,798 | ||||
Per share data | ||||||||||
Net income, basic | $ 0.42 | $ 0.47 | $ 0.46 | $ 0.44 | $ 0.88 | $ 0.91 | ||||
Net income, diluted | $ 0.41 | $ 0.47 | $ 0.46 | $ 0.43 | $ 0.87 | $ 0.90 | ||||
Average number of shares outstanding - basic | 7,526,284 | 7,485,625 | 7,518,375 | 7,475,522 | 7,522,034 | 7,477,678 | ||||
Average number of shares outstanding - diluted | 7,607,349 | 7,537,179 | 7,594,840 | 7,522,568 | 7,605,381 | 7,527,829 | ||||
Shares outstanding period end | 7,566,633 | 7,539,587 | 7,559,760 | 7,524,944 | 7,566,633 | 7,539,587 | ||||
Return on average assets | 0.76 % | 0.94 % | 0.87 % | 0.92 % | 0.82 % | 0.93 % | ||||
Return on average common equity | 10.82 % | 10.51 % | 10.31 % | 9.74 % | 10.54 % | 10.12 % | ||||
Return on average common tangible equity | 12.48 % | 11.89 % | 11.63 % | 11.01 % | 12.02 % | 11.45 % | ||||
Net interest margin (non taxable equivalent) | 2.90 % | 3.17 % | 2.87 % | 3.20 % | 2.89 % | 3.18 % | ||||
Net interest margin (taxable equivalent) | 2.93 % | 3.20 % | 2.91 % | 3.23 % | 2.92 % | 3.22 % | ||||
Efficiency ratio1 | 71.60 % | 67.50 % | 69.93 % | 69.16 % | 70.77 % | 68.31 % | ||||
1 Calculated by dividing non-interest expense by net interest income on tax equivalent basis and non interest income, excluding gain on sale of other assets and other non-recurring noninterest income. |
FIRST COMMUNITY CORPORATION | ||||||||
Yields on Average Earning Assets and | ||||||||
Rates on Average Interest-Bearing Liabilities | ||||||||
Three months ended June 30, 2022 | Three months ended June 30, 2021 | |||||||
Average | Interest | Yield/ | Average | Interest | Yield/ | |||
Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||
Assets | ||||||||
Earning assets | ||||||||
Loans | ||||||||
PPP loans | $ 256 | $ 1 | 1.57 % | $ 55,599 | $ 756 | 5.45 % | ||
Non-PPP loans | 896,363 | 9,303 | 4.16 % | 840,013 | 8,985 | 4.29 % | ||
Total loans | 896,619 | 9,304 | 4.16 % | 895,612 | 9,741 | 4.36 % | ||
Non-taxable securities | 52,064 | 375 | 2.89 % | 54,791 | 387 | 2.83 % | ||
Taxable securities | 508,353 | 1,674 | 1.32 % | 376,074 | 1,507 | 1.61 % | ||
Int bearing deposits in other banks | 72,813 | 160 | 0.88 % | 76,242 | 29 | 0.15 % | ||
Fed funds sold | 3 | - | 0.00 % | 1,517 | - | 0.00 % | ||
Total earning assets | 1,529,852 | 11,513 | 3.02 % | 1,404,236 | 11,664 | 3.33 % | ||
Cash and due from banks | 28,379 | 25,128 | ||||||
Premises and equipment | 32,442 | 34,105 | ||||||
Goodwill and other intangibles | 15,496 | 15,674 | ||||||
Other assets | 48,950 | 39,235 | ||||||
Allowance for loan losses | (11,211) | (10,670) | ||||||
Total assets | $ 1,643,908 | $ 1,507,708 | ||||||
Liabilities | ||||||||
Interest-bearing liabilities | ||||||||
Interest-bearing transaction accounts | $ 342,289 | $ 45 | 0.05 % | $ 305,393 | $ 51 | 0.07 % | ||
Money market accounts | 313,141 | 117 | 0.15 % | 267,788 | 109 | 0.16 % | ||
Savings deposits | 154,687 | 22 | 0.06 % | 132,429 | 19 | 0.06 % | ||
Time deposits | 151,549 | 125 | 0.33 % | 159,133 | 269 | 0.68 % | ||
Fed funds purchased | - | - | NA | 2 | - | 0.00 % | ||
Securities sold under agreements to repurchase | 72,120 | 22 | 0.12 % | 60,468 | 19 | 0.13 % | ||
Other short-term debt | - | - | NA | - | - | NA | ||
Other long-term debt | 14,964 | 131 | 3.51 % | 14,964 | 105 | 2.81 % | ||
Total interest-bearing liabilities | 1,048,750 | 462 | 0.18 % | 940,177 | 572 | 0.24 % | ||
Demand deposits | 466,309 | 420,358 | ||||||
Other liabilities | 12,782 | 11,950 | ||||||
Shareholders' equity | 116,067 | 135,223 | ||||||
Total liabilities and shareholders' equity | $ 1,643,908 | $ 1,507,708 | ||||||
Cost of deposits, including demand deposits | 0.09 % | 0.14 % | ||||||
Cost of funds, including demand deposits | 0.12 % | 0.17 % | ||||||
Net interest spread | 2.84 % | 3.09 % | ||||||
Net interest income/margin - excluding PPP loans | $ 11,050 | 2.90 % | $ 10,336 | 3.07 % | ||||
Net interest income/margin - including PPP loans | $ 11,051 | 2.90 % | $ 11,092 | 3.17 % | ||||
Net interest income/margin (tax equivalent) - excl. PPP loans | $ 11,179 | 2.93 % | $ 10,459 | 3.11 % | ||||
Net interest income/margin (tax equivalent) - incl. PPP loans | $ 11,180 | 2.93 % | $ 11,215 | 3.20 % |
FIRST COMMUNITY CORPORATION | ||||||||
Yields on Average Earning Assets and | ||||||||
Rates on Average Interest-Bearing Liabilities | ||||||||
Six months ended June 30, 2022 | Six months ended June 30, 2021 | |||||||
Average | Interest | Yield/ | Average | Interest | Yield/ | |||
Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||
Assets | ||||||||
Earning assets | ||||||||
Loans | ||||||||
PPP loans | $ 432 | $ 46 | 21.47 % | $ 55,570 | $ 1,440 | 5.23 % | ||
Non-PPP loans | 886,108 | 18,261 | 4.16 % | 835,451 | 17,751 | 4.28 % | ||
Total loans | 886,540 | 18,307 | 4.16 % | 891,021 | 19,191 | 4.34 % | ||
Non-taxable securities | 52,352 | 755 | 2.91 % | 55,033 | 776 | 2.84 % | ||
Taxable securities | 513,740 | 3,453 | 1.36 % | 347,228 | 2,852 | 1.66 % | ||
Int bearing deposits in other banks | 70,011 | 193 | 0.56 % | 77,412 | 63 | 0.16 % | ||
Fed funds sold | 9 | - | 0.00 % | 1,131 | - | 0.00 % | ||
Total earning assets | 1,522,652 | 22,708 | 3.01 % | 1,371,825 | 22,882 | 3.36 % | ||
Cash and due from banks | 28,444 | 21,797 | ||||||
Premises and equipment | 32,581 | 34,227 | ||||||
Goodwill and other intangibles | 15,516 | 15,700 | ||||||
Other assets | 45,171 | 38,683 | ||||||
Allowance for loan losses | (11,218) | (10,548) | ||||||
Total assets | $ 1,633,146 | $ 1,471,684 | ||||||
Liabilities | ||||||||
Interest-bearing liabilities | ||||||||
Interest-bearing transaction accounts | $ 337,059 | $ 90 | 0.05 % | $ 291,511 | $ 109 | 0.08 % | ||
Money market accounts | 304,387 | 228 | 0.15 % | 261,137 | 250 | 0.19 % | ||
Savings deposits | 150,039 | 42 | 0.06 % | 129,223 | 38 | 0.06 % | ||
Time deposits | 152,213 | 282 | 0.37 % | 159,724 | 570 | 0.72 % | ||
Fed funds purchased | - | - | NA | - | - | NA | ||
Securities sold under agreements to repurchase | 77,308 | 47 | 0.12 % | 61,878 | 47 | 0.15 % | ||
Other short-term debt | - | - | NA | - | - | NA | ||
Other long-term debt | 14,964 | 235 | 3.17 % | 14,964 | 209 | 2.82 % | ||
Total interest-bearing liabilities | 1,035,970 | 924 | 0.18 % | 918,437 | 1,223 | 0.27 % | ||
Demand deposits | 457,842 | 405,209 | ||||||
Other liabilities | 12,736 | 12,637 | ||||||
Shareholders' equity | 126,598 | 135,401 | ||||||
Total liabilities and shareholders' equity | $ 1,633,146 | $ 1,471,684 | ||||||
Cost of deposits, including demand deposits | 0.09 % | 0.16 % | ||||||
Cost of funds, including demand deposits | 0.12 % | 0.19 % | ||||||
Net interest spread | 2.83 % | 3.09 % | ||||||
Net interest income/margin - excluding PPP loans | $ 21,738 | 2.88 % | $ 20,219 | 3.10 % | ||||
Net interest income/margin - including PPP loans | $ 21,784 | 2.89 % | $ 21,659 | 3.18 % | ||||
Net interest income/margin (tax equivalent) - excl. PPP loans | $ 21,998 | 2.91 % | $ 20,450 | 3.13 % | ||||
Net interest income/margin (tax equivalent) - incl. PPP loans | $ 22,044 | 2.92 % | $ 21,890 | 3.22 % |
The tables below provide a reconciliation of non‑GAAP measures to GAAP for the periods indicated:
June 30, |
March 31, | December 31, | September 30, | June 30, | |||||||||||||
Tangible book value per common share | 2022 | 2022 | 2021 | 2021 | 2021 | ||||||||||||
Tangible common equity per common share (non‑GAAP) | $ | 13.50 | $ | 14.53 | $ | 16.62 | $ | 16.37 | $ | 16.22 | |||||||
Effect to adjust for intangible assets | 2.04 | 2.06 | 2.06 | 2.07 | 2.07 | ||||||||||||
Book value per common share (GAAP) | $ | 15.54 | $ | 16.59 | $ | 18.68 | $ | 18.44 | $ | 18.29 | |||||||
Tangible common shareholders' equity to tangible assets | |||||||||||||||||
Tangible common equity to tangible assets (non‑GAAP) | 6.12 | % | 6.71 | % | 8.00 | % | 8.00 | % | 8.18 | % | |||||||
Effect to adjust for intangible assets | 0.86 | % | 0.88 | % | 0.90 | % | 0.92 | % | 0.94 | % | |||||||
Common equity to assets (GAAP) | 6.98 | % | 7.59 | % | 8.90 | % | 8.92 | % | 9.10 | % |
June 30, |
March 31, | December 31, | September 30, | June 30, | |||||||||||||
Tangible book value per common share excluding accumulated other comprehensive income (loss) | 2022 | 2022 | 2021 | 2021 | 2021 | ||||||||||||
Tangible common equity per common share (non‑GAAP) | $ | 17.00 | $ | 16.52 | $ | 16.18 | $ | 15.76 | $ | 15.23 | |||||||
Effect to adjust for intangible assets and accumulated other comprehensive income (loss) | (1.46) | 0.07 | 2.50 | 2.68 | 3.06 | ||||||||||||
Book value per common share (GAAP) | $ | 15.54 | $ | 16.59 | $ | 18.68 | $ | 18.44 | $ | 18.29 | |||||||
Tangible common shareholders' equity to tangible assets excluding accumulated other comprehensive income (loss) | |||||||||||||||||
Tangible common equity to tangible assets (non‑GAAP) | 7.59 | % | 7.56 | % | 7.80 | % | 7.72 | % | 7.70 | % | |||||||
Effect to adjust for intangible assets and accumulated other comprehensive income (loss) | (0.61) | % | 0.03 | % | 1.10 | % | 1.20 | % | 1.40 | % | |||||||
Common equity to assets (GAAP) | 6.98 | % | 7.59 | % | 8.90 | % | 8.92 | % | 9.10 | % |
Return on average tangible common equity | Three months ended June 30, | Three months | Six months ended June 30, | |||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||
Return on average common tangible equity (non-GAAP) |
12.48 |
% | 11.89 | % | 11.63 | % | 11.01 | % | 12.02 | % | 11.45 | % |
Effect to adjust for intangible assets |
(1.66) | % |
(1.38) | % | (1.32) | % | (1.27) | % | (1.48) | % | (1.33) | % |
Return on average common equity (GAAP) | 10.82 |
% |
10.51 | % | 10.31 | % | 9.74 | % | 10.54 | % | 10.12 | % |
Three months ended | Six months ended | |||||||||||
June 30, | March 31, | June 30, |
June 30, | |||||||||
Pre-tax, pre-provision earnings | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||
Pre-tax, pre-provision earnings (non‑GAAP) | $ | 3,872 | $ | 4,153 | $ | 4,632 | $ | 8,025 | $ | 8,955 | ||
Effect to adjust for pre-tax, pre-provision earnings | (742) | (664) | (1,089) | (1,406) | (2,157) | |||||||
Net Income (GAAP) | $ | 3,130 | $ | 3,489 | $ | 3,543 | $ | 6,619 | $ | 6,798 |
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
Net interest margin excluding PPP Loans | 2022 | 2021 | 2022 | 2021 | |||||||||
Net interest margin excluding PPP loans (non-GAAP) | 2.90 % | 3.07 % | 2.88 % | 3.10 % | |||||||||
Effect to adjust for PPP loans | 0.00 | 0.10 | 0.01 | 0.08 | |||||||||
Net interest margin (GAAP) | 2.90 % | 3.17 % | 2.89 % | 3.18 % | |||||||||
Three months ended | Six months ended | |||||||||||||
June 30, | June 30, | |||||||||||||
Net interest margin on a tax-equivalent basis excluding PPP Loans | 2022 | 2021 | 2022 | 2021 | ||||||||||
Net interest margin on a tax-equivalent basis excluding PPP loans (non-GAAP) | 2.93 % | 3.11 % | 2.91 % | 3.13 % | ||||||||||
Effect to adjust for PPP loans | 0.00 | 0.09 | 0.01 | 0.09 | ||||||||||
Net interest margin on a tax equivalent basis (GAAP) | 2.93 % | 3.20 % | 2.92 % | 3.22 % | ||||||||||
June 30, | March 31, | Growth | Annualized | |||||||||||
Loans and loan growth | 2022 | 2022 | Dollars | Rate | ||||||||||
Non-PPP Loans and Related Credit Facilities (non-GAAP) | $ | 916,082 | 875,528 | 40,554 | 18.6 | % | ||||||||
PPP Related Credit Facilities | 0 | 0 | 0 | 0 | % | |||||||||
Non-PPP Loans (non‑GAAP) | $ | 916,082 | $ | 875,528 | $ | 40,554 | 18.6 | % | ||||||
PPP Loans | 250 | 269 | (19) | (28.3) | % | |||||||||
Total Loans (GAAP) | $ | 916,332 | $ | 875,797 | $ | 40,535 | 18.6 | % | ||||||
June 30, | June 30, | Growth | Annualized | |||||||||||
Loans and loan growth | 2022 | 2021 | Dollars | Rate | ||||||||||
Non-PPP Loans and Related Credit Facilities (non-GAAP) | $ | 916,082 | 829,086 | 86,996 | 10.5 | % | ||||||||
PPP Related Credit Facilities | 0 | 2,003 | (2,003) | (100.0) | % | |||||||||
Non-PPP Loans (non‑GAAP) | $ | 916,082 | $ | 831,089 | $ | 84,993 | 10.2 | % | ||||||
PPP Loans | 250 | 47,229 | (46,979) | (99.5) | % | |||||||||
Total Loans (GAAP) | $ | 916,332 | $ | 878,318 | $ | 38,014 | 4.3 | % | ||||||
Certain financial information presented above is determined by methods other than in accordance with generally accepted accounting principles ("GAAP"). These non-GAAP financial measures include "Tangible book value per common share," "Tangible common shareholders' equity to tangible assets," "Tangible book value per common share excluding accumulated other comprehensive income (loss)," "Tangible common shareholders' equity to tangible assets excluding accumulated other comprehensive income (loss)," "Return on average tangible common equity," "Pre-tax, pre-provision earnings," "Net interest margin excluding PPP Loans," "Net interest margin on a tax-equivalent basis excluding PPP Loans," "Non-PPP Loans and Related Credit Facilities," and "Non-PPP Loans."
- "Tangible book value per common share" is defined as total equity reduced by recorded intangible assets divided by total common shares outstanding.
- "Tangible common shareholders' equity to tangible assets" is defined as total common equity reduced by recorded intangible assets divided by total assets reduced by recorded intangible assets.
- "Tangible book value per common share excluding accumulated other comprehensive income (loss)" is defined as total equity reduced by recorded intangible assets and accumulated other comprehensive income (loss) divided by total common shares outstanding.
- "Tangible common shareholders' equity to tangible assets excluding accumulated other comprehensive income (loss)" is defined as total common equity reduced by recorded intangible assets and accumulated other comprehensive income (loss) divided by total assets reduced by recorded intangible assets and other comprehensive income (loss).
- "Return on average tangible common equity" is defined as net income on an annualized basis divided by average total equity reduced by average recorded intangible assets.
- "Pre-tax, pre-provision earnings" is defined as net interest income plus non-interest income, reduced by non-interest expense.
- "Net interest margin excluding PPP Loans" is defined as annualized net interest income less annualized interest income on PPP Loans divided by average earning assets less the average balance of PPP Loans.
- "Net interest margin on a tax-equivalent basis excluding PPP Loans" is defined as annualized net interest income on a tax-equivalent basis less annualized interest income on PPP Loans divided by average earning assets less the average balance of PPP Loans.
- "Non-PPP Loans and Related Credit Facilities" is defined as Total Loans less PPP Related Credit Facilities and PPP Loans.
- "Non-PPP Loans" is defined as Total Loans less PPP Loans.
- "Non-PPP Loans and Related Credit Facilities Growth - Dollars" is calculated by taking the difference between two time periods compared for Total Loans less PPP Loans and PPP Related Credit Facilities. "Non-PPP Loans and Related Credit Facilities – Annualized Growth Rate" is calculated by (i) dividing "Non-PPP Loans and Related Credit Facilities Loan Growth - Dollars" by the number of days between the two time periods compared (ii) times the number of days in the year (iii) divided by the prior time period Non-PPP Loans and Related Credit Facilities balance.
- "Non-PPP Loans Growth - Dollars" is calculated by taking the difference between two time periods compared for Total Loans less PPP Loans. "Non-PPP Loans – Annualized Growth Rate" is calculated by (i) dividing "Non-PPP Loans Loan Growth - Dollars" by the number of days between the two time periods compared (ii) times the number of days in the year (iii) divided by the prior time period Non-PPP Loans balance.
Our management believes that these non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare our operating results from period-to-period in a meaningful manner. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the company's results as reported under GAAP.
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SOURCE First Community Corporation
Spread & Containment
IFM’s Hat Trick and Reflections On Option-To-Buy M&A
Today IFM Therapeutics announced the acquisition of IFM Due, one of its subsidiaries, by Novartis. Back in Sept 2019, IFM granted Novartis the right to…
Today IFM Therapeutics announced the acquisition of IFM Due, one of its subsidiaries, by Novartis. Back in Sept 2019, IFM granted Novartis the right to acquire IFM Due as part of an “option to buy” collaboration around cGAS-STING antagonists for autoimmune disease.
This secures for IFM what is a rarity for a single biotech company: a liquidity hat trick, as this milestone represents the third successful exit of an IFM Therapeutics subsidiary since its inception in 2015.
Back in 2017, BMS purchased IFM’s NLRP3 and STING agonists for cancer. In early 2019, Novartis acquired IFM Tre for NLRP3 antagonists for autoimmune disease, which are now being studied in multiple Phase 2 studies. Then, later in 2019, Novartis secured the right to acquire IFM Due after their lead program entered clinical development. Since inception, across the three exits, IFM has secured over $700M in upfront cash payments and north of $3B in biobucks.
Kudos to the team, led by CEO Martin Seidel since 2019, for their impressive and continued R&D and BD success.
Option-to-Acquire Deals
These days option-based M&A deals aren’t in vogue: in large part because capital generally remains abundant despite the contraction, and there’s still a focus on “going big” for most startup companies. That said, lean capital efficiency around asset-centric product development with a partner can still drive great returns. In different settings or stages of the market cycle, different deal configurations can make sense.
During the pandemic boom, when the world was awash in capital chasing deals, “going long” as independent company was an easy choice for most teams. But in tighter markets, taking painful levels of equity dilution may be less compelling than securing a lucrative option-based M&A deal.
For historical context, these option-based M&A deals were largely borne out of necessity in far more challenging capital markets (2010-2012) on the venture front, when both the paucity of private financing and the tepid exit environment for early stage deals posed real risks to biotech investment theses. Pharma was willing to engage on early clinical or even preclinical assets with these risk-sharing structures as a way to secure optionality for their emerging pipelines.
As a comparison, in 2012, total venture capital funding into biotech was less than quarter of what it is now, even post bubble contraction, and back then we had witnessed only a couple dozen IPOs in the prior 3 years combined. And most of those IPOs were later stage assets in 2010-2012. Times were tough for biotech venture capital. Option-based deals and capital efficient business models were part of ecosystem’s need for experimentation and external R&D innovation.
Many flavors of these option-based deals continued to get done for the rest of the decade, and indeed some are still getting done, albeit at a much less frequent cadence. Today, the availability of capital on the supply side, and the reduced appetite for preclinical or early stage acquisitions on the demand side, have limited the role of these option to buy transactions in the current ecosystem.
But if the circumstances are right, these deals can still make some sense: a constructive combination of corporate strategy, funding needs, risk mitigation, and collaborative expertise must come together. In fact, Arkuda Therapeutics, one of our neuroscience companies, just announced a new option deal with Janssen.
Stepping back, it’ s worth asking what has been the industry’s success rate with these “option to buy” deals.
Positive anecdotes of acquisition options being exercised over the past few years are easy to find. We’ve seen Takeda exercise its right to acquire Maverick for T-cell engagers and GammaDelta for its cellular immunotherapy, among other deals. AbbVie recently did the same with Mitokinin for a Parkinson’s drug. On the negative side, in a high profile story last month, Gilead bailed on purchasing Tizona after securing that expensive $300M option a few years ago.
But these are indeed just a few anecdotes; what about data since these deal structures emerged circa 2010? Unfortunately, as these are mostly private deals with undisclosed terms, often small enough to be less material to the large Pharma buyer, there’s really no great source of comprehensive data on the subject. But a reasonable guess is that the proportion of these deals where the acquisition right is exercised is likely 30%.
This estimate comes from triangulating from a few sources. A quick and dirty dataset from DealForma, courtesy of Tim Opler at Stifel, suggests 30% or so for deals 2010-2020. Talking to lawyers from Goodwin and Cooley, they also suggest ballpark of 30-50% in their experience. The shareholder representatives at SRS Acquiom (who manage post-M&A milestones and escrows) also shared with me that about 33%+ of the option deals they tracked had converted positively to an acquisition. As you might expect, this number is not that different than milestone payouts after an outright acquisition, or future payments in licensing deals. R&D failure rates and aggregate PoS will frequently dictate that within a few years, only a third of programs will remain alive and well.
Atlas’ experience with Option-based M&A deals
Looking back, we’ve done nearly a dozen of these option-to-buy deals since 2010. These took many flavors, from strategic venture co-creation where the option was granted at inception (e.g., built-to-buy deals like Arteaus and Annovation) to other deals where the option was sold as part of BD transaction for a maturing company (e.g., Lysosomal Therapeutics for GBA-PD).
Our hit rate with the initial option holder has been about 40%; these are cases where the initial Pharma that bought the option moves ahead and exercises that right to purchase the company. Most of these initial deals were done around pre- or peri-clinical stage assets. But equally interesting, if not more so, is that in situations where the option expired without being exercised, but the asset continued forward into development, all of these were subsequently acquired by other Pharma buyers – and all eight of these investments generated positive returns for Atlas funds. For example, Rodin and Ataxion had option deals with Biogen (here, here) that weren’t exercised, and went on to be acquired by Alkermes and Novartis (here, here). And Nimbus Lakshmi for TYK2 was originally an option deal with Celgene, and went on to be purchased by Takeda.
For the two that weren’t acquired via the option or later, science was the driving factor. Spero was originally an LLC holding company model, and Roche had a right to purchase a subsidiary with a quorum-sensing antibacterial program (MvfR). And Quartet had a non-opioid pain program where Merck had acquired an option. Both of these latter programs were terminated for failing to advance in R&D.
Option deals are often criticized for “capping the upside” or creating “captive companies” – and there’s certainly some truth to that. These deals are structured, typically with pre-specified return curves, so there is a dollar value that one is locked into and the presence of the option right typically precludes a frothy IPO scenario. But in aggregate across milestones and royalties, these deals can still secure significant “Top 1%” venture upside though if negotiated properly and when the asset reaches the market: for example, based only on public disclosures, Arteaus generated north of $300M in payments across the upfront, milestones, and royalties, after spending less than $18M in equity capital. The key is to make sure the right-side of the return tail are included in the deal configuration – so if the drug progresses to the market, everyone wins.
Importantly, once in place, these deals largely protect both the founders and early stage investors from further equity dilution. While management teams that are getting reloaded with new stock with every financing may be indifferent to dilution, existing shareholders (founders and investors alike) often aren’t – so they may find these deals, when negotiated favorably, to be attractive relative to the alternative of being washed out of the cap table. This is obviously less of a risk in a world where the cost of capital is low and funding widely available.
These deal structures also have some other meaningful benefits worth considering though: they reduce financing risk in challenging equity capital markets, as the buyer often funds the entity with an option payment through the M&A trigger event, and they reduce exit risk, as they have a pre-specified path to realizing liquidity. Further, the idea that the assets are “tainted” if the buyer walks hasn’t been borne out in our experience, where all of the entities with active assets after the original option deal expired were subsequently acquired by other players, as noted above.
In addition, an outright sale often puts our prized programs in the hands of large and plodding bureaucracies before they’ve been brought to patients or later points in development. This can obviously frustrate development progress. For many capable teams, keeping the asset in their stewardship even while being “captive”, so they can move it quickly down the R&D path themselves, is an appealing alternative to an outright sale – especially if there’s greater appreciation of value with that option point.
Option-based M&A deals aren’t right for every company or every situation, and in recent years have been used only sparingly across the sector. They obviously only work in practice for private companies, often as alternative to larger dilutive financings on the road to an IPO. But for asset-centric stories with clear development paths and known capital requirements, they can still be a useful tool in the BD toolbox – and can generate attractive venture-like returns for shareholders.
Like others in the biotech ecosystem, Atlas hasn’t done many of these deals in recent funds. And it’s unlikely these deals will come back in vogue with what appears to be 2024’s more constructive fundraising environment (one that’s willing to fund early stage stories), but if things get tighter or Pharma re-engages earlier in the asset continuum, these could return to being important BD tools. It will be interesting to see what role they may play in the broader external R&D landscape over the next few years.
Most importantly, circling back to point of the blog, kudos to the team at IFM and our partners at Novartis!
The post IFM’s Hat Trick and Reflections On Option-To-Buy M&A appeared first on LifeSciVC.
preclinical pandemic mitigationGovernment
Student Loan Forgiveness Is Robbing Peter To Pay Paul
Student Loan Forgiveness Is Robbing Peter To Pay Paul
Via SchiffGold.com,
With President Biden’s Saving on a Valuable Education (SAVE)…
With President Biden’s Saving on a Valuable Education (SAVE) plan set to extend more student loan relief to borrowers this summer, the federal government is pretending it can wave a magic wand to make debts disappear. But the truth of student debt “relief” is that they’re simply shifting the burden to everyone else, robbing Peter to pay Paul and funneling more steam into an inflation pressure cooker that’s already set to burst.
Starting July 1st, new rules go into effect that change the discretionary income requirements for their payment plans from 10% to only 5% for undergraduates, leading to lower payments for millions. Some borrowers will even have their owed balances revert to zero.
What the plan doesn’t describe, predictably, is how that burden will be shifted to the rest of the country by stealing value out of their pockets via new taxes or increased inflation, which still simmering well above levels seen in early 2020 before the Fed printed trillions in Covid “stimulus” money. They’re rewarding students who took out loans they can’t afford and punishing those who paid their way or repaid their loans, attending school while living within their means. And they’re stealing from the entire country to finance it.
Biden actually claims that a continuing Covid “emergency” is what gives him the authority to offer student loan forgiveness to begin with. As with any “temporary” measure that gives state power a pretense to grow, or gives them an excuse to collect more revenue (I’m looking at you, federal income tax), COVID-19 continues to be the gift that keeps on giving for power and revenue-hungry politicians even as the CDC reclassifies the virus as a threat similar to the seasonal flu.
The SAVE plan takes the burden of billions of dollars in owed payments away from students and adds it to a national debt that’s already ballooning to the tune of a mind-boggling trillion dollars every 3 months. If all student loan debt were forgiven, according to the Brookings Institution, it would surpass the cumulative totals for the past 20 years for multiple existing tax credits and welfare programs:
“Forgiving all student debt would be a transfer larger than the amounts the nation has spent over the past 20 years on unemployment insurance, larger than the amount it has spent on the Earned Income Tax Credit, and larger than the amount it has spent on food stamps.”
Ironically enough, adding hundreds of billions to the national debt from Biden’s program is likely to cause the most pain to the very demographics the Biden administration claims to be helping with its plan: poor people, anyone who skipped college entirely or paid their loans back, and other already overly-indebted young adults, whose purchasing power is being rapidly eroded by out-of-control government spending and central bank monetary shenanigans. It effectively transfers even more wealth from the poor to the wealthy, a trend that Covid-era measures have taken to new extremes.
As Ron Paul pointed out in a recent op-ed for the Eurasia Review:
“…these loans will be paid off in part by taxpayers who did not go to college, paid their own way through school, or have already paid off their student loans. Since those with college degrees tend to earn more over time than those without them, this program redistributes wealth from lower to higher income Americans.”
Even some progressives are taking aim at the plan, not because it shifts the debt burden to other Americans, but because it will require cutting welfare or sacrificing other expensive social programs promised by Biden such as universal pre-K. For these critics, the issue isn’t so much that spending and debt are totally out of control, but that they’re being funneled into the wrong issues.
Progressive “solutions” always seem to take the form of slogans like “tax the wealthy,” a feel-good bromide that for lawmakers always seems to translate into increased taxes for the middle and lower-upper class. Meanwhile, the .01% continue to avoid taxes through offshore accounts, money laundering trickery dressed up as philanthropy, and general de facto ownership of the system through channels like political donations and aggressive lobbying.
If new waves of college applicants expect loan forgiveness plans to continue, it also encourages schools to continue raising tuition and motivates prospective students to continue with even more irresponsible borrowing.
This puts pressure on the Fed to keep interest rates lower to help accommodate waves of new student loan applicants from sparkly-eyed young borrowers who figure they’ll never really have to pay the money back.
With the Fed already expected to cut rates this year despite inflation not being properly under control, the loan forgiveness scheme is just one of many factors conspiring to cause inflation to start running hotter again, spiraling out of control, as the entire country is forced to pay the hidden tax of price increases for all their basic needs.
Uncategorized
Bougie Broke The Financial Reality Behind The Facade
Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive…
Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive restaurants. Yet they complain about living paycheck to paycheck and lacking the means to support their lifestyle.
Bougie broke is like “keeping up with the Joneses,” spending beyond one’s means to impress others.
Bougie Broke gives us a glimpse into the financial condition of a growing number of consumers. Since personal consumption represents about two-thirds of economic activity, it’s worth diving into the Bougie Broke fad to appreciate if a large subset of the population can continue to consume at current rates.
The Wealth Divide Disclaimer
Forecasting personal consumption is always tricky, but it has become even more challenging in the post-pandemic era. To appreciate why we share a joke told by Mike Green.
Bill Gates and I walk into the bar…
Bartender: “Wow… a couple of billionaires on average!”
Bill Gates, Jeff Bezos, Elon Musk, Mark Zuckerberg, and other billionaires make us all much richer, on average. Unfortunately, we can’t use the average to pay our bills.
According to Wikipedia, Bill Gates is one of 756 billionaires living in the United States. Many of these billionaires became much wealthier due to the pandemic as their investment fortunes proliferated.
To appreciate the wealth divide, consider the graph below courtesy of Statista. 1% of the U.S. population holds 30% of the wealth. The wealthiest 10% of households have two-thirds of the wealth. The bottom half of the population accounts for less than 3% of the wealth.
The uber-wealthy grossly distorts consumption and savings data. And, with the sharp increase in their wealth over the past few years, the consumption and savings data are more distorted.
Furthermore, and critical to appreciate, the spending by the wealthy doesn’t fluctuate with the economy. Therefore, the spending of the lower wealth classes drives marginal changes in consumption. As such, the condition of the not-so-wealthy is most important for forecasting changes in consumption.
Revenge Spending
Deciphering personal data has also become more difficult because our spending habits have changed due to the pandemic.
A great example is revenge spending. Per the New York Times:
Ola Majekodunmi, the founder of All Things Money, a finance site for young adults, explained revenge spending as expenditures meant to make up for “lost time” after an event like the pandemic.
So, between the growing wealth divide and irregular spending habits, let’s quantify personal savings, debt usage, and real wages to appreciate better if Bougie Broke is a mass movement or a silly meme.
The Means To Consume
Savings, debt, and wages are the three primary sources that give consumers the ability to consume.
Savings
The graph below shows the rollercoaster on which personal savings have been since the pandemic. The savings rate is hovering at the lowest rate since those seen before the 2008 recession. The total amount of personal savings is back to 2017 levels. But, on an inflation-adjusted basis, it’s at 10-year lows. On average, most consumers are drawing down their savings or less. Given that wages are increasing and unemployment is historically low, they must be consuming more.
Now, strip out the savings of the uber-wealthy, and it’s probable that the amount of personal savings for much of the population is negligible. A survey by Payroll.org estimates that 78% of Americans live paycheck to paycheck.
More on Insufficient Savings
The Fed’s latest, albeit old, Report on the Economic Well-Being of U.S. Households from June 2023 claims that over a third of households do not have enough savings to cover an unexpected $400 expense. We venture to guess that number has grown since then. To wit, the number of households with essentially no savings rose 5% from their prior report a year earlier.
Relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many families. When faced with a hypothetical expense of $400, 63 percent of all adults in 2022 said they would have covered it exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”). The remainder said they would have paid by borrowing or selling something or said they would not have been able to cover the expense.
Debt
After periods where consumers drained their existing savings and/or devoted less of their paychecks to savings, they either slowed their consumption patterns or borrowed to keep them up. Currently, it seems like many are choosing the latter option. Consumer borrowing is accelerating at a quicker pace than it was before the pandemic.
The first graph below shows outstanding credit card debt fell during the pandemic as the economy cratered. However, after multiple stimulus checks and broad-based economic recovery, consumer confidence rose, and with it, credit card balances surged.
The current trend is steeper than the pre-pandemic trend. Some may be a catch-up, but the current rate is unsustainable. Consequently, borrowing will likely slow down to its pre-pandemic trend or even below it as consumers deal with higher credit card balances and 20+% interest rates on the debt.
The second graph shows that since 2022, credit card balances have grown faster than our incomes. Like the first graph, the credit usage versus income trend is unsustainable, especially with current interest rates.
With many consumers maxing out their credit cards, is it any wonder buy-now-pay-later loans (BNPL) are increasing rapidly?
Insider Intelligence believes that 79 million Americans, or a quarter of those over 18 years old, use BNPL. Lending Tree claims that “nearly 1 in 3 consumers (31%) say they’re at least considering using a buy now, pay later (BNPL) loan this month.”More telling, according to their survey, only 52% of those asked are confident they can pay off their BNPL loan without missing a payment!
Wage Growth
Wages have been growing above trend since the pandemic. Since 2022, the average annual growth in compensation has been 6.28%. Higher incomes support more consumption, but higher prices reduce the amount of goods or services one can buy. Over the same period, real compensation has grown by less than half a percent annually. The average real compensation growth was 2.30% during the three years before the pandemic.
In other words, compensation is just keeping up with inflation instead of outpacing it and providing consumers with the ability to consume, save, or pay down debt.
It’s All About Employment
The unemployment rate is 3.9%, up slightly from recent lows but still among the lowest rates in the last seventy-five years.
The uptick in credit card usage, decline in savings, and the savings rate argue that consumers are slowly running out of room to keep consuming at their current pace.
However, the most significant means by which we consume is income. If the unemployment rate stays low, consumption may moderate. But, if the recent uptick in unemployment continues, a recession is extremely likely, as we have seen every time it turned higher.
It’s not just those losing jobs that consume less. Of greater impact is a loss of confidence by those employed when they see friends or neighbors being laid off.
Accordingly, the labor market is probably the most important leading indicator of consumption and of the ability of the Bougie Broke to continue to be Bougie instead of flat-out broke!
Summary
There are always consumers living above their means. This is often harmless until their means decline or disappear. The Bougie Broke meme and the ability social media gives consumers to flaunt their “wealth” is a new medium for an age-old message.
Diving into the data, it argues that consumption will likely slow in the coming months. Such would allow some consumers to save and whittle down their debt. That situation would be healthy and unlikely to cause a recession.
The potential for the unemployment rate to continue higher is of much greater concern. The combination of a higher unemployment rate and strapped consumers could accentuate a recession.
The post Bougie Broke The Financial Reality Behind The Facade appeared first on RIA.
recession unemployment pandemic economic recovery stimulus fed recession recovery interest rates unemployment stimulus-
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